The equity multiplier formula is said to be the final key of the system. Using the equity multiplier formula is very basic. All you need to enter is this formula.
Total Assets / Common Shareholder’s Equity = Equity Multiplier
In these total assets will show the liability of the assets and common shareholders will only share the assets of the preferred shares.
Equity multiplier is a leverage ratio that is to measure the assets of companies that are totally funded by equity. You can calculate it by dividing the total assets of the company with the total shareholder equity. It is also used to highlight the levels of debt.
How to calculate the equity multiplier formula?
You can easily calculate the equity multiplier formula by putting the below values.
Equity Multiplier = Total Assets / Total Shareholder’s Equity
You can easily make a balance sheet and jot down all the total assets and the shareholder’s equity. Through this you will easily be able to calculate the values.
Example
Let’s suppose an XYZ is a software house that deals with internal cables for home and businesses. The owner of the company is willing to go public next year so that he can easily sell shares of his company to the public and can gain profit. Before he introduces it to the public he makes sure that the current equity multiplier ratio is enough to show it in public. Last year’s report shows that the company owns a total assets of $7, 000,000 and shareholder’s equity stands at $900,000. The equity multiplier ratio for this software house will be calculated with the following formula.
Equity Multiplier = $9,000,000 / $700,000 = 1.25.
How to calculate the Debt Ratio Using the Equity Multiplier?
Debt ratio and equity multiplier are most importantly used to measure the level of debt of the company. When companies finance their assets these two sources play the most vital role. The Debt to equity ratio formula is
Total Capital = Total Debt + Total Equity
What is a good debt to equity ratio?
A good debt to equity ratio is the proportion of the assets of the company which are dealt through debts. It can be calculated through this method.
Debt Ratio = Total Debt / Total Assets
By using this example of the software house. The debt ratio is calculated as
Debt Ratio = 300,000 / 2,000,000 = 0.3 or 30%
This equity multiplier is also used to figure out the debt ratio of the company by using this simple formula.
Debt Ratio = 1 – (1/Equity Multiplier)
Debt Ratio = 1 – (1/1.25) = 1 – (0.8) = 0.2 or 20%
DuPont equity multiplier formula
DuPont is basically a method formed by DuPont Corporation. By this you can easily review the taxes. By DuPont equity multiplier formula it breaks the return of equity into 3 constitutions which are net profit margin, asset turnover, and equity multiplier. Return of equity is used to measure the total income earned by the shareholders in a year. Once the value of ROE changes with time DuPont shows the attributable to financial leverage. There are two formulas you can use. Both of them are mentioned below.
ROE = Net Profit Margin x Total Assets Turnover Ratio x Financial Leverage Ratio
or
ROE = [Net Income / Sales] x [Sales / Average Total Assets] x [Average Total Assets / Average Shareholder’s Equity]
How does this equity multiplier formula work?
Equity multiplier formula works as a financial statement. In this financial analysis is done to find the use of debt in the company. In any finance company you will see that the company assets are equal to the debt plus equity. Although debt is not refrained from the equity formula but it is a numerator of the equity multiplier formula which has debts too.
The equity multiplier helps creditors to evaluate?
The equity multiplier is very useful as it helps creditors to analyse the debt of the company and equity financing strategy.
The biggest ratio means that the more the assets are funded by debt the more the equity.
Equity multiplier calculator
When the company’s equity multiplier increases it shows that the larger area of the total assets are being sourced from debts. This is definitely the financial leverage. As the higher the debts the more they have to pay the debts. If you want to use an Equity multiplier calculator you need to put the exact values of the company’s total assets which are being funded by debt and by equity. You need to enter the values in the section. First you have to put the value of total stockholders equity and then total assets and you will get the result.
What is a low and negative equity multiplier?
Negative equity multiplier shows that the company is not established enough on taking debts. It means the servicing cost of debt should be decreased to the lowest rates.
Because of this the company may face a crisis in allotting loans.
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Equity multiplier formula excel
In the equity multiplier formula you need five two inputs or equity multiplier and total assets. By this, you can easily find out the equity multiplier ratio in the following excel chart.
- Step 1: In the first step we have to find out the total assets.
- Step 2: In step 2 you have to find out the equity multiplier.
Leverage ratio formula
The calculation of leverage ratio depends upon the total debt and the total assets of the business. The leverage ratio has two major keys which are the Debt ratio and the Debt to equity ratio.
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Debt ratio:
The debt ratio can easily be calculated by these steps which are as follows.
Step 1: In step add the total debt and total assets from the balance sheet.
Step 2: In this step, you will finally find out the ratio which is calculated by dividing the total assets.
Debt Ratio = Total Debt / Total Assets
Debt to equity ratio:
By following the below steps you can easily debt to the equity ratio.
- In this, the total debt and the equity are summed up by the liability mentioned on the balances sheet.
- In step 2 the debt to equity ratio will be calculated by dividing the debt by the total equity.
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Debt to Equity Ratio = Total Debt / Total Equity
You can also use leverage ratio formulas for bank loans and real estates as well.
