In other words, Illinois Tool Works is excellently sweating its assets, even if those assets were supported by taking on more debt. Additionally, a low equity multiplier is not always a positive indicator for a company. In some cases, it could mean the company is unable to find lenders willing to loan it money. A low equity multiplier could also indicate that a company’s growth prospects are low because its financial leverage is low. Automobile manufacturers are known to have a stable equity multiplier with an average of around 6x. Internet and content companies and discount stores feature a low equity multiplier, implying that the industry relies on debt.

Which is better: A high or low equity multiplier?

The higher the value, the greater the company’s financial leverage. However, a lower ratio is appreciated as it indicates that a company is not obtaining debts to meet its asset requirements. The equity multiplier helps us understand how much of the company’s assets are financed by adjusting entries the shareholders’ equity and is a simple ratio of total assets to total equity.

What is the equity multiplier?

• The multiplier ratio is also used in the DuPont analysis to illustrate how leverage affects a firm’s return on equity.
• The debt obligation and the pressure of loan repayment will eat away the earnings if the business is not strategically planned to manage its finances in an optimum way.
• Internet and content companies and discount stores feature a low equity multiplier, implying that the industry relies on debt.
• This will give a more thorough a clear financial analysis that is useful in making decisions for both stakeholders and the management.
• After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career.

Let us now consider the same example to check how to use the equity multiplier formula in Excel with the two inputs – Total Assets and Equity Multiplier. Here, the available details help calculate the equity multiplier ratio easily in the template provided. A high Equity Multiplier entails that the firm isn’t highly leveraged and the ownership is highly diluted. If an equity multiplier is low, it implies that the company is highly leveraged, increasing the investment risk. As equity multiplier an investor, if you look at a company and its multiplier, you would only be able to tell whether the company has been using high or low financial leverage ratios.

The equity multiplier and DuPont analysis

This caused some weakness in US futures, but the losses were quite modest. It did create more volatility in currency markets with weakness in the Chinese Yuan, Canadian Dollar but particularly the Mexican Peso which is down ~2% verse the USD. Losses in the local equity markets were contained down less than 1%. Equity multiplier does not take into account interest payments on debt, types of debt a company has, or types of equity a company has.

• Automobile manufacturers are known to have a stable equity multiplier with an average of around 6x.
• On the other hand, company DEF, which is in the same sector as company ABC, has total assets of $20 million and stockholders’ equity of $10 million.
• The Mayor’s Office for Economic Opportunity uses evidence and innovation to reduce poverty and increase equity.
• This is because a greater portion of ABC Company’s financing comes from debt, which must be repaid with interest.
• The company’s total assets were $257 billion as of end of fiscal year 2017, with $43 billion of shareholder equity.

A high equity multiplier means that the company’s capital structure is more leveraged i.e. it has more debt. The equity multiplier is a commonly used financial ratio calculated by dividing a company’s total asset value by total net equity. Companies finance their operations with equity or debt, so a higher equity multiplier indicates that a larger portion of asset financing is attributed to debt. The equity multiplier is therefore a variation of the debt ratio, in which the definition of debt financing includes all liabilities.

Meanwhile, Verizon’s telecommunications business model is similar to utility companies, which have stable, predictable cash flows and typically carry high debt levels. Apple is more susceptible to changing economic conditions or evolving industry standards than a utility or a traditional telecommunications firm. Let’s compare Apple to Verizon Communications (VZ), which has a different business model. The company’s total assets were Bookstime $366.6 billion for the fiscal year 2021, with $83.2 billion of shareholders’ equity. The equity multiplier for Verizon was 4.41x (366.6 ÷ 83.2) based on these values.