# What Is the Equity Multiplier?

> **Definition**
>
> The equity multiplier is a financial ratio that indicates the proportion of a company's assets that are financed by shareholders' equity rather than debt.

## What Is the Equity Multiplier?

The equity multiplier is a risk indicator that measures the portion of a company’s assets financed by [shareholders' equity](https://www.investopedia.com/terms/s/stockholdersequity.asp) rather than debt. The equity multiplier is calculated by dividing a company's total asset value by the total equity held in the company's stock. The equity multiplier is also known as the [leverage ratio](https://www.investopedia.com/terms/l/leverageratio.asp) or financial leverage ratio and is one of three ratios used in the [DuPont analysis](https://www.investopedia.com/terms/d/dupontanalysis.asp).

### Key Takeaways

*   An equity multiplier measures the portion of the company’s assets financed by stock rather than debt.
*   Investors compare a company's equity multiplier to its peers in the sector.
*   The equity multiplier is also known as the financial leverage ratio.

![Equity Multiplier](https://www.investopedia.com/thmb/Fzq5sQVwANqxZ2vcFP2ZUbvjSHQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/equitymultiplier_final-2af505394e33454ba63357f4289c25eb.png)

*— Investopedia / Nez Riaz*

## Debt and Financing

Companies finance the [acquisition](https://www.investopedia.com/terms/a/acquisition.asp) of assets by issuing equity or debt. In some cases, they use a combination of both. Investors monitor how much shareholders' equity is used to pay for and finance a company's assets. This ratio is a risk indicator to determine a company's leverage.

A company's equity multiplier is only [high or low](https://www.investopedia.com/ask/answers/042115/which-better-high-or-low-equity-multiplier.asp) when compared to historical standards, the averages for the industry, or the company's peers:

*   A high equity multiplier indicates a company uses a large amount of debt to finance its assets. Companies with a higher debt burden will have higher [debt servicing](https://www.investopedia.com/terms/d/debtservice.asp) costs and 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 as positive because its debt servicing costs are lower. It may signal that the company can't entice [lenders](https://www.investopedia.com/terms/l/lender.asp) to loan it money on favorable terms.

> **Warning**
>
> Because their assets are generally financed by debt, companies with high equity multipliers may be at risk of default.

## Formula

$\begin{aligned}&\text{Equity Multiplier} = \frac{ \text{Total Assets} }{ \text{Total Shareholders' Equity} } \\&\textbf{where:} \\&\text{Total Assets} = \text{Both current and long-term assets} \\&\text{Total Shareholders' Equity} = \text{Total assets} - \\&\text{total liabilities} \\\end{aligned}$  

## Using the Equity Multiplier

An equity multiplier of "2" means that half the company's assets are financed with debt, while the other half with equity. The equity multiplier is used in DuPont analysis, a method of financial assessment devised by the chemical company for its internal financial review. [The DuPont model](https://www.investopedia.com/ask/answers/041615/what-are-some-advantages-and-disadvantages-dupont-analysis.asp) breaks the calculation of [return on equity (ROE)](https://www.investopedia.com/terms/r/returnonequity.asp) into three ratios:

*   [Net profit margin (NPM)](https://www.investopedia.com/terms/n/net_margin.asp)
*   [Asset turnover ratio](https://www.investopedia.com/terms/a/assetturnover.asp)
*   Equity multiplier

If ROE changes over time or diverges from normal levels, the DuPont analysis can indicate how much of this is attributable to financial leverage. If the equity multiplier fluctuates, it can significantly affect ROE.

> **Important**
>
> Higher financial leverage, such as a higher equity multiple, drives ROE upward as long as all other factors remain equal.

## Examples

Consider Apple's ([AAPL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=AAPL)) balance sheet at the end of the 2021 fiscal year. The company's total assets were $351 billion, and the book value of shareholders' equity was $63 billion. The company's equity multiplier was 5.57x (351 ÷ 63).

Let's compare Apple to Verizon Communications ([VZ](https://www.investopedia.com/markets/quote?tvwidgetsymbol=VZ)), which has a different [business model](https://www.investopedia.com/terms/b/businessmodel.asp). The company's total assets were $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.

Apple's relatively high equity multiplier indicates that the business relies more heavily on financing from debt and other interest-bearing liabilities. Meanwhile, Verizon's telecommunications business model is similar to utility companies, which have stable, predictable [cash flows](https://www.investopedia.com/terms/c/cashflow.asp) and typically carry high debt levels. Apple is more susceptible to changing [economic conditions](https://www.investopedia.com/terms/e/economic-conditions.asp) or evolving industry standards than a utility or a traditional telecommunications firm. As a result, Apple carries more financial leverage.

## Is a Higher Equity Multiplier Better?

Average equity multipliers vary from industry to industry. Investors commonly look for companies with a low equity multiplier because this indicates the company is using more equity and less debt to finance the purchase of assets. Companies that have higher debt burdens could prove financially riskier.

## What Does an Equity Multiplier of 5 Mean?

An equity multiplier of 5.0x would indicate that the value of its assets is five times larger than its equity. In other words, assets are funded 80% by debt and 20% by equity.

## What Affects the Equity Multiplier?

A company's equity multiplier varies if the value of its assets changes, or the level of liabilities changes. If assets increase while liabilities decrease, the equity multiplier becomes smaller. That's because it uses less debt and more shareholders' equity to finance its assets.

## The Bottom Line

The equity multiplier is a financial ratio that measures how much of a company's assets are financed through stockholders' equity. Lower equity multipliers are generally better for investors, but this can vary between sectors. Conversely, high leverage can be part of an effective growth strategy, especially if the company can borrow more cheaply than its cost of equity.

_Correction—Jan. 19, 2023:_ An earlier version of this article stated that a company's equity multiplier grows larger if its assets increase while its liabilities decrease. This was corrected to show that the reverse is true—that the equity multiplier becomes smaller because it uses less debt to finance its assets.  

> **Article Sources**
>
> 1.  Association of Financial Professionals. "[The DuPont System](https://www.afponline.org/training-resources/resources/articles/Details/the-dupont-system-comprehensive-ratio-analysis)."
>     
> 2.  U.S. Securities and Exchange Commission. "[Apple, Inc., Form 10-K, for the Fiscal Year Ended September 25, 2021](https://d18rn0p25nwr6d.cloudfront.net/CIK-0000320193/42ede86f-6518-450f-bc88-60211bf39c6d.pdf)." Page 31.
>     
> 3.  U.S. Securities and Exchange Commission. "[Verizon Communications Inc., Form 10-K, for the Fiscal Year Ended December 31, 2021](https://www.verizon.com/about/sites/default/files/2021-Annual-Report-on-Form-10-K.pdf)." Page 53.