I know, you are strolling her to get an answer to your question. Am I right?
I think, yes! You want to know about equity Multiplier. Well, my friend, let me tell you that the equity multiplier is a financial term.
An equity multiplier is that ratio which is used to determine the financial leverage of the company. Basically, it tells about the financial health of the company.
If equality multiplier ratio is low, it indicates the lower financial leverage and if it is high it indicates the higher financial leverage.
Well! Well! Well! Let me tell you the fact that the lower one is the better option. It is because a company uses less debt to finance its resources.
Still confused? Ok! Don’t worry. I will explain you with the formula and the example.
Let’s watch the whole show..!
How To Find Out Equity Multiplier Ratio?
The formula for calculating the equity multiplier is:
Equity Multiplier = Total Assets／total Stockholders
For example, if a company with the name XYZ has 20 units as total assets and 5 stockholders. Then the equity multiplier will be:-
Equity Multiplier = 20／5
Equity Multiplier = 4
So, we found that equity multiplier of that company will be 4. You can calculate this way in your business. The calculation of the equity multiplier ratio is really important.
Every company used to calculate the equity multiplier by making a balance sheet in regular intervals. This tells you about the financial well-being of your company.
But an expert team is required in calculating the equity multiplier. This is how you can find out the equity multiplier ratio of your company.
How is The Ratio Being Misunderstood?
However, the equity multiplier ratio is sometimes misunderstood. Let’s see how it is being misunderstood?
Payables: If the ratio is increased or you can say that if the ratio is at higher side, it is assumed that huge amount of the amount borrowed that is the debt is used to fund.
It can be possible that the company is delaying its payments in favor to fund the assets. In that situation, the entity is at higher risk of getting cut off credit by the supplier. Which may decline its liquidity.
Profitability: if the business is running with the profit. It can finance most of its goods with one hand payment and need not borrow the amount from anyone.
This concept is only successful when excess wealth is distributed among the shareholders or stock repurchases in the form of the dividend.
Timing: if a company conducts a huge amount of billing at the last phase of the month, this can bend the total figure of assets to the upward, due to increase in a number of accounts receivable.
Depreciation: if a company use the quick depreciation, doing it in an artificial manner reduces the amount used in the numerator of the total assets.
This is about how and when the equity multiplier ratio is being misunderstood.
What Do Others Know That You
Do you think that you are too late? You always remain on the back bench when the business is swinging in the market and other money holders are kicking you out. Is that true?
It happened with me also. So, don’t you worry about! I am going to utter the things that you are still unaware of.
Stay in front by getting the analysis and the latest insight in your personal box every day, that is every morning when you start and every evening when you close.
If you are fed up of losing trades day in day out and looking for some wall, then start your day with ready to take on the business and prior informed.
This is now, what you know which others don’t actually.
How ridiculously easy it is? Right?
Hold The Hammer.. Let’s Break it Down..
Let’s break down the level of equity multiplier ratio. If you are want to know, come with me.
The DuPont Formula
This formula breaks down the ROE i.e Range of equity into three segments. These are:-
- Financial leverage
This formula is used by the money holders or you can say the investors to analyze the source of the organization’s range of equity compared with other competing organizations in the same roadshow.
How To Perform This?
“ROE = net profit margin × asset turnover × equity multiplier”
Also, it can be written as:
“ROE = (net profit ÷ sales) × (sales ÷ assets) × (assets ÷ equity)”
An organization may increase its range of equity by adding on additional leverage. It is desired by the firms who want to increase their turnover or the margins.
This is how you can break the equity multiplier ratio.
You Calculate Your Profit But First Let me Go!!!
Well, my dear, we have discussed the equity multiplier. The equity multiplier ratio and some formulas.
Lots of competitors are growing in the market, if we want to survive, we need to learn some tactics. We need to explore new things every day.
This is the point where we lack.
You need to calculate your daily sun to moon profit and loss, then only you will be able to cope up with the environment.
In this article, I have talked about various things like breaking the Equity Multiplier, some unnoticed things. So, next time when you are going to prepare your balance sheet keep them in mind.
Tell me if you still have some bolts to be tightened, I am there to handle them all.