A company's equity multiple is a debt-management ratio that measures the proportion of the company's total assets financed by its owners' equity. A company's equity multiple is also known as its equity multiplier, financial leverage ratio and leverage ratio. A high equity multiple indicates that the company has a large amount of debt financing relative to its owners' equity.
Obtain a copy of the company's balance sheet. If the company is publicly traded, the company must file its balance sheet as well as other key financial documents on a quarterly (Form 10-Q) and annual (Form 10-K) basis with U.S. Securities and Exchange Commission (SEC). To find such filings, visit the sec.gov website and search the Next-Generation EDGAR system.
Find the company's total assets as listed on its balance sheet. For example, assume that Company X's total assets are $20.7 million.
Find the company's total owners' equity as listed on its balance sheet. Continuing with the same example, assume that Company X's total owners' equity is $9.25 million.
Divide the company's total assets (the number you obtained in Step 1) by the company's total owners' equity (the number you obtained in Step 2). Continuing with the same example, divide $20.7 million by $10.25 million to get an equity multiple of 2.02. This equity multiple indicates that Company X's total assets are worth about twice as much as its owners' equity.
Compare a company's equity multiple with that of its competitors. Continuing with the same example, assume that Company X's competitors have an average equity multiple of 1.3. The fact that Company X's equity multiple of 2.02 is higher than that of its competitors indicates that Company X has made more use of debt financing than its competitors and is therefore operating with a higher risk level than its competitors.
Items you will need
- Balance sheet
- If a company has an equity multiple of 1, it has no debt.
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