everything you need to know about equity multiplier

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Everything you need to know about Equity Multiplier

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Learn what is equity multiplier, its use and its derivation with Transtutors through this presentation.

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Page 2: Everything you need to know about equity multiplier

Equity multiplier is a ratio that measures the

financial leverage of a company. How much a

company can afford to use its debt for financing its

assets is Equity Multiplier. The equity multiplier can

also be termed as the leverage ratio or the

financial leverage ratio.

Page 3: Everything you need to know about equity multiplier

Equity multiplier evalutaes how much a company’s total assets per dollar of stockholders’ equity are.

A higher the equity multiplier indicates higher financial leverage concluding that the company relies more on debt to finance its assets.

Page 4: Everything you need to know about equity multiplier

The formula for calculating Equity Multiplier ratio is:

Equity Multiplier =Total Assets

Stockholder's Equity In addition to this

formula, an alternative formula is also used for calculating equity multiplier:

1 / Equity Ratio

Page 5: Everything you need to know about equity multiplier

The equity multiplier formula is used to calculate the Return on Equity.

In the formula for ROE, Equity multiplier contributes to financial leverage, a tool of financial analysis that assesses a company's use of debt.

Page 6: Everything you need to know about equity multiplier

Here are a few simple guideline points as to how

to bring Equity Multiplier to use.

Calculate the the equity multiplier using the formula. Obtain your direct competitors’ data and calculate the equity

multiplier for these companies. Along with that, calculate the average Equity Multiplier of the industry as a whole.

Compare your equity multiplier with that of its competitors and the average of the industry. A higher equity multiplier than the average indicates too much of risk involved in the company’s actions.

At last, compare your own past records with the current equity multiplier to identify the ups and downs.

Page 7: Everything you need to know about equity multiplier

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Page 8: Everything you need to know about equity multiplier

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