Shareholders Equity/Equity multiplier
The term equity multiplier refers to risk indicator that measures the portion of a company's assets that is financed by shareholders' Equity rather than by debt.
The equity multiplier is calculated by dividing a company's total asset value by the total equity held in the company's stock.
A high equity multiplier indicates that a company is using high amount of debt to finance its assets.
A low equity multiplier means that the company has less reliance on debt.
The equity multiplier is also known as the leverage ratio or financial leverage ratio
Companies with a higher debt burden will have higher debt servicing cost, which means that they will have to generate more cash flow to sustain a healthy business.
A low equity multiplier implies that the company has fewer debt-financed assets. That is usually seen opposite because it's debt servicing costs are lower.
Equity multiplier = Total Assets /Total Shareholders Equity.
In general, lower equity multipliers are better for investors but this can vary between industries and companies with particular industries. In some cases, a low equity multiplier could actually indicate that the company cannot find willing lenders or it could also signal that company's growth prospects are low.
On the other hand , a high equity multiplier is not always sure sign of risk. High leverage can be a part of an effective growth strategy especially if the company is able to borrow more cheaply than its cost of equity
.jpg)