Equity Multiplier: Understanding Leverage and Financial Risk

The equity multiplier is figured by dividing the total assets, by the total common stockholder's equity. Every dollar of equity translates into the equity multiplier showing the amount of assets for the company. An equity multiplier is used to evaluate if a company finance its assets with debt.

When you have a high equity multiplier, the company in question finances its assets with debt. For example, if a company has assets totaling $13,500, and a total equity of $7,500, their equity multiplier is 1.8. According to this example, every dollar of equity the company has $1.8 of assets.