An equity multiplier can help creditors and investors evaluate a company’s level of indebtedness before deciding on a loan or investing.
So, taking out the liabilities part of the equation in the equity multiplier indicates the value of the assets it has relative to its equity and can likewise show how much debt it has taken on.Creditors and investors alike use the equity multiplier as a way to assess how much leverage a company has before they decide to loan money or make an investment.
A low multiple could show that the company isn’t highly leveraged, indicating that it doesn’t want to take on too much debt and still has room to borrow. In some cases, however, a low multiple might also suggest that, for some reason or another, a company has difficulty borrowing. A bank may not be willing to extend credit to a company that has a very high equity multiplier.DNY59 via Getty ImagesTo calculate a company’s equity multiplier, divide its total assets by its shareholders’ equity. Both of these figures can be found in the balance sheet section of the financial statement.
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