How is the equity multiplier calculated?

The equity multiplier is a financial metric used to assess a company's financial leverage, indicating the proportion of a company's assets that are financed by its equity. It is calculated by dividing total assets by total equity. This ratio helps investors understand how much of the company's assets are financed by shareholders' equity versus debt.

When evaluating a company's structure, a higher equity multiplier indicates that the company is using more debt to finance its assets, while a lower multiplier suggests that it relies more on equity financing. Therefore, understanding the equity multiplier is essential for analyzing a firm's financial health, risk, and capital structure.

In contrast, other calculations, such as total equity divided by total assets, would provide insight into the proportion of assets financed by equity, but this does not reflect the degree of leverage. Similarly, net income divided by total equity measures return on equity, and cash flow divided by equity highlights liquidity rather than leverage. Thus, the correct method for calculating the equity multiplier is indeed by dividing total assets by total equity.