Definition Of Equity Multiplier In Accounting

Total assets total stockholders equity equity multiplier.

Definition of equity multiplier in accounting. In other words the equity multiplier shows the percentage of assets that are financed or owed by the shareholders. Let s say that company z has total assets of 100 000. See also financial leverage. Since the equity multiplier measures the leverage level of the company the higher it is the greater the extent of leverage.

The equity multiplier is a financial leverage ratio that measures the amount of a firm s assets that are financed by its shareholders by comparing total assets with total shareholder s equity. The equity multiplier is a calculation of how much of a company s assets is financed by stock rather than debt. Relationship between debt ratio and equity multiplier. Formula for the equity multiplier.

This information is located on a company s balance sheet so the multiplier can be easily constructed by an outsider who has access to a company s financial statements. For investors it is a risk indicator. Amount or percentage of assets owned by each dollar of the equity invested in a business. The formula for the equity multiplier ratio is as follows.

This is a simple example but after calculating this ratio we would be able to know how much assets are financed by equity and how much assets are financed by debt. Its total equity is 20 000.