What it is:
The equity multiplier is a ratio used to determine the financial leverage of a company.
How it works (Example):
The formula for the equity multiplier is:
Equity Multiplier = Total Assets / Total Stockholders' Equity
If company ABC has total assets of 20 units and total stockholders' equity of 4 units, its equity multiplier is 5 (20/4).
Alternatively, company XYZ has total assets of 10 units and total stockholders' equity of 5 units, its equity multiplier is 2 (10/5).
Since company ABC has a higher equity multiplier, it can be said to rely more heavily on debt in order to finance its assets.