Calculate and Interpret the Equity Multiplier Ratio

The equity multiplier ratio is used to measure a company’s total assets against stockholder’s equity, providing a way for investors to examine the level to which a company uses debt to finance its assets. A high equity multiplier indicates a more highly-leveraged company. The equity multiplier, like other leverage ratios, can help investors determine whether a company is heading for financial problems due to an excessive debt load.

About Leverage Ratios

Leverage refers to a company’s use of debt to finance its assets. Companies often use leverage in an effort to increase returns to their shareholders; a company with substantially more debt than equity are considered “highly leveraged”. While some companies choose to finance their operations through their cash flows alone, other companies look to seize opportunities through the prudent use of leverage, believing the possible benefits exceed the costs and potential risk associated with borrowing.

Click here to go to Yahoo! Finance to collect data for the calculation. Enter the stock symbol in the Get Quotes window and click Balance Sheet under Financials in the lower left.

The Risk to Investors

Investing in highly-leveraged companies can be risky to investors. While companies without leverage risk only their invested capital into any specific project, companies that utilize leverage risk not only their own capital but also the money they borrow, increasing the risk associated with the project and potential losses if the project is not successful.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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