Equity Multiplier Formula + Calculator

An equity multiplier of 5.0x would indicate that the value of its assets is five times larger than its equity. Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer. There is no one-size-fits-all equity multiplier that would be considered good for any company.

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A higher equity multiplier indicates a Accounting Security business with more of its assets financed by debt, suggesting greater financial risk. By contrast, a lower ratio suggests more of a company’s assets are paid for by shareholders, referring to potentially safer financial prospects. It is essentially used to understand how a company is leveraging its equity to finance its assets. JPMorgan Chase’s equity multiplier ratio of 13.29x is significantly higher than the previous examples, indicating a much greater reliance on debt financing. As a financial institution, JPMorgan Chase operates with a higher debt-to-equity ratio compared to non-financial companies. This high financial leverage can amplify the bank’s returns during favorable economic conditions but also increases its vulnerability to financial shocks and regulatory scrutiny.

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This indicator gives an indication of the ratio of assets raised from shareholders’ funds to those acquired through debt financing. 2 The premium bonus and interest bonus are credited only to the Protected Income Value (PIV). To receive the PIV, including the value of what is an equity multiplier these bonuses, lifetime withdrawals must be taken. Clients will not receive these bonuses if the contract is fully withdrawn or if traditional annuity payments are taken. If the client takes any type of withdrawal the PIV will be reduced proportionally.

• The company’s total assets were $375 billion, and the book value of shareholder equity was $134 billion.
• Gentex Corporation has the lowest equity multiplier and Ford Motor ranks highest.
• A high Equity Multiplier entails that the firm isn’t highly leveraged and the ownership is highly diluted.
• The Index is an excess return index, which means that it captures the returns of the underlying constituents which are in excess of a short-term interest rate.
• The table below lists the main features of this method of company valuation.
• In this case, the equity multiplier value of 2 indicates that the firm has financed half of its total assets by borrowing or other non-equity sources.

Equity Multiplier vs. Interest Coverage Ratio

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Additionally, a low equity multiplier is not always a positive indicator for a company. In some cases, it could mean the company is unable to find lenders willing to loan it money. A low equity multiplier could also indicate that a company’s growth prospects are low because its financial leverage is low. There can be times when a high equity multiplier reflects a company’s strategy that makes it more profitable and allows it to purchase assets at a lower cost. If ROE changes over time or diverges from normal levels, the DuPont analysis can indicate how much of this is attributable to financial leverage.

• The current ratio is a liquidity ratio that assesses a company’s ability to meet short-term obligations, providing a different perspective from the equity multiplier.
• Higher multiplier ratios tend to deliver higher returns on equity according to the DuPont analysis.
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• Preferred stocks are not included in the equity multiplier formula because they represent fixed liabilities of the company.
• However, Douyin’s impact is declining year-over-year due to shifting platform dynamics and user behaviours.
• If the client takes any type of withdrawal the PIV will be reduced proportionally.
• An increase in equity multiplier alone cannot be seen as negative, but a decrease in equity multiplier can be seen as positive.