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Equity Multiplier Calculation Exampleįor our illustrative scenario, we will calculate the equity multiplier of a company with the following balance sheet data. We’ll now move to a modeling exercise, which you can access by filling out the form below. High Multiplier: If the multiplier is “high,” the company’s operations and asset purchases are financed primarily by debt, making it prone to default risk.īut as is the case for practically all financial metrics, the determination of whether a company’s equity multiplier is high (or low) is dependent on the industry average and that of comparable peers.Īnother exception is for mature, established companies with high debt capacities, as one “economic moat” of the company is its access to financing with favorable lending terms (and ability to purchase inventory from suppliers at lower prices due to buying power).Low Multiplier: If the multiplier is “low”, the company either cannot obtain debt from lenders, or the use of debt is intentionally avoided by management – so continued operations are a positive signal that the current equity capital on-hand and retained earnings are sufficient.founders, institutional investors), as well as its retained earnings. Therefore, a lower multiplier is usually perceived as better, since the company is relying more on equity contributed by the owners (e.g. More reliance on debt financing results in higher credit risk – all else being equal.īy contrast, a lower multiplier means that the company has less reliance on debt (and reduced default risk). Higher equity multipliers typically signify that the company is utilizing a high percentage of debt in its capital structure to finance working capital needs and asset purchases. between the beginning and end of period value for balance sheet metrics). To match the timing between the denominator and numerator among all three ratios, the average balance is used (i.e. Revenue and net income each represent income statement metrics, meaning that they measure across a period of time – whereas assets and equity are balance sheet metrics, which are the carrying values at a specific point in time. Equity Multiplier = Average Total Assets ÷ Average Shareholders’ Equity.Asset Turnover = Revenue ÷ Average Total Assets.Net Profit Margin = Net Income ÷ Revenue.DuPont Analysis = Net Profit Margin × Asset Turnover × Equity Multiplier