What is the equity multiplier?
The equity multiplier is a metric used to determine a company’s financial leverage based on its assets and shareholders' equity. On a company’s balance sheet, its total assets must equal the sum of its total liabilities and total equity.
So, taking out the liabilities part of the equation in the equity multiplier indicates the value of the assets it has relative to its equity and can likewise show how much debt it has taken on.
Why is the equity multiplier important?
Creditors and investors alike use the equity multiplier as a way to assess how much leverage a company has before they decide to loan money or make an investment. The equity multiplier can indicate whether a company has more debt than it could possibly manage or doesn’t carry too much debt and could stand to borrow more.
Related: What is a leverage ratio? Definition, calculation, and examples
What do high and low equity multipliers mean?
A high ratio might mean that a company is using a significant amount of debt to finance its operations. A multiple that rises over time would indicate that a company has resorted to increasing its borrowing, and a continuing upward trend might suggest it is putting itself at financial risk.
A low multiple could show that the company isn’t highly leveraged, indicating that it doesn’t want to take on too much debt and still has room to borrow. In some cases, however, a low multiple might also suggest that, for some reason or another, a company has difficulty borrowing.
How to calculate and interpret the equity multiplier
To calculate a company’s equity multiplier, divide its total assets by its shareholders’ equity. Both of these figures can be found in the balance sheet section of the financial statement. For publicly traded companies, this can be found in the quarterly or annual filings reported to the Securities and Exchange Commission.
Equity multiplier formula
Equity Multiplier = Total Assets / Shareholders’ Equity
A ratio of 1 indicates that a company’s assets are equivalent to its shareholders’ equity, and less than 1 would suggest that a company is financing itself entirely through its own equity.
Equity multiplier examples: Apple, Uber, and Consolidated Edison
In the third quarter of 2023, Apple (AAPL) -) reported third-quarter earnings results, with assets of $332.2 billion and equity of $66.2 billion. Using the equity multiplier formula, $332.2 billion divided by $66.2 billion shows a multiple of 5, indicating that Apple finances more of its assets with debt than with equity.
In the third quarter of 2023, ride-sharing provider Uber (UBER) -) reported assets of $34.1 billion and equity of $9.4 billion, which put its equity multiplier at 3.6.
By comparison, in the same period, Consolidated Edison (ED) -), an electric utility in New York City, listed its assets at $63.8 billion and equity at $20.8 billion, which put its equity multiplier at 3.1.
High vs. low equity multiplier: What’s the difference?
It is normal for equity multipliers to vary significantly between companies, and companies in a particular industry might tend to have higher ratios than those in another industry.
Apple, for example, is the biggest company in the world by market capitalization, and to finance its operations and continue to grow, it resorts to borrowing. Utilities such as Con Ed typically try to keep their finances under control and don’t borrow as much. On the other hand, Uber, which has experienced a string of annual losses as a growing company, might be constrained by its ability to borrow large amounts of money.
What are the limitations of the equity multiplier?
While the equity multiplier can indicate a company’s financial leverage, it might provide an incomplete picture of a company’s financial strength and its ability or willingness to borrow. Other measures and metrics such as cash flow, debt-to-equity ratio, and gross profit margin can help in analyzing a company’s financial performance and indebtedness.
