What is the Equity Multiplier?
The Equity Multiplier measures the proportion of a company’s assets funded by its equity shareholders as opposed to debt providers.
Equity Multiplier Formula
How to Calculate the Equity Multiplier (Step-by-Step)
The formula for calculating the equity multiplier consists of dividing a company’s total asset balance by its total shareholders’ equity.
Formula
- Equity Multiplier = Average Total Assets ÷ Average Total Shareholders’ Equity
For instance, if a company has an equity multiplier of 2x, the takeaway is that financing is split equally between equity and debt.
DuPont Analysis and Equity Multiplier
The equity multiplier is one of the ratios that make up the DuPont analysis, which is a framework to calculate the return on equity (ROE) of companies.
In the three-step DuPont analysis variation, the equity multiplier is multiplied by the net profit margin and asset turnover.
3-Step DuPont Analysis Formula
- DuPont Analysis = Net Profit Margin × Asset Turnover × Equity Multiplier
Where:
- Net Profit Margin = Net Income ÷ Revenue
- Asset Turnover = Revenue ÷ Average Total Assets
- Equity Multiplier = Average Total Assets ÷ Average Shareholders’ Equity
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.
To match the timing between the denominator and numerator among all three ratios, the average balance is used (i.e. between the beginning and end of period value for balance sheet metrics).