Equity Multiplier

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The equity multiplier is a company's total assets divided by its shareholders' equity, showing how much of its assets are funded by equity rather than debt and other liabilities.

The equity multiplier is a measure of financial leverage. A higher figure means more of the company's assets are financed by borrowing and other liabilities, and less by shareholders' money.

For example, a company with total assets of 5,000,000 and equity of 2,000,000 has an equity multiplier of 2.5. For every 1 of equity, it controls 2.50 of assets.

The equity multiplier is one of the three parts of DuPont analysis, which breaks return on equity into profit margin, asset turnover and the equity multiplier. A rising equity multiplier increases return on equity, but also increases risk.

Typical levels vary by industry. Banks have very high equity multipliers, often well above ten, because most of their assets are funded by deposits and borrowing. Industrial companies usually have much lower ones. An equity multiplier of 1 means the company has no liabilities at all.

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