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Equity Multiplier (Definition, Formula) | Calculation with Example - YouTube
Channel: WallStreetMojo
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hello everyone hi welcome to the channel
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clicking the bell icon friends today we're
going to learn a concept which is known
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as equity multiplier well to understand
this we need to get into the
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nitty-gritty of the same the purpose of
the equity multiplier the e/m is to see
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how much the assets of a company are
financed by its total shareholder as you
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can say a total shareholders equity so
that we can find out how much assets of
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the company are financed by the external
source of Finance right so in this
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tutorial we'll have a closer look at the
ratio and how exactly it works let's
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have a look now there is one graph that
is available to you
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Facebook assets to shareholders equity
ratio and you have GoDaddy's assets to
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shareholders equity ratio we see this is
one of the financial leverage the equity
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multiplier is one of the financial
leverage ratio busy basically it helps
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in investors to find out how much the
assets have been financed by these
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shareholders equity
now equity multiplies the ratio of the
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total assets to the total equity if the
ratio in this ratio is higher then you
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can say that the Financial leverage is the
FL is lower
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let's say this I'm talking about the
ratio if the ratio is higher you can
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expect the financial leverage as lower
in the end if the ratio turns out to be
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lower than what exactly the financial
average is going to be higher this is
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the comparison now what do we know -
over here we know that from the graph
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that GoDaddy has the highest equity
multiplier of 6.73x whereas the
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Facebook has a consistent line up you
can see the equity multiplier is at
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1.097 x so let's
understand the formula part if you see
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the equity multiplier formula it goes
something like this equity multiplier is
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your total
/ a total equity right so this is going
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to be a form formula along along with
finding out each unit of the total
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assets for each unit of the total equity
it tells a lot about how much a company
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has been financed its its assets through
external source of Finance and mainly
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I'm talking about - here that is debt
right let's take an example to
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illustrate this so that we have some
idea exactly what we are talking about
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here with the formula let's say this is
the company that's Z which has its total
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assets that are standing at $1,00,000
and it has its own total equity
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which is standing at let's say $20,000
right so what we need
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to do we need to calculate the equity
multiplier over here so this is a very
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simple example but after calculating the
equity multiplier we would be able to
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know how much the assets are financed by
the equity and how much the assets are
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financed by the debt so this is what we
are supposed to find what is the ratio
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between the financing we just need to
put the figures into the equity
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multiplier formula and then we have the
answer to it so the equity multiplier
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formula e M is equal to your total
assets divided by your total equity so
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we'll just put on the numbers total
assets divided by our total equity which
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gives our final answer as 1,00,000/
20,000 which gives us 5 so the
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multiplier is fine that means that the
total assets are financed by 20% that is
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20,000 divided by your total assets
right so 20% is been financed with the
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help of equity and the debt has to be
the balance right so we'll say is equal
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to 1 minus 20% so 80% financed through
day this is important consideration
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since Finance leverage would be higher
lower depending upon the multiplier
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whether multiplier is higher or lower
which we learned here the ratio and the
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financial leverage higher the ratio
lower the financial leverage and lower
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the ratio higher differential leverage
so now let's understand this from the
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interpretation part
now as an investor if you look at the
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company and its multiplier you would
only be able to tell whether the company
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has been using high or low financial
leverage ratio however to know whether
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the company is risk or company is risky
or not you need to you need to do
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something else as well I mean you need
to pull out similar companies that is
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the comp or comparable companies in the
same industry and calculate the equity
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multiplier for the same now if you see
that the result is similar to the
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company you want to invest in then you
would be able to understand high or low
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financial leverage ratio I mean is the
norm of the industry that means if the
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company is financing its assets by let's
say debt financing I'm talking
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about and the other companies in the
industry let's say are have been doing
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the same then this may be unknown
basically you can say that so but you
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can say that you know the the financing
assets through debt is still you can say
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a risky job risky business and that's
why you need to go do to go to the
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advanced computing competition and look
at the financial leverage ratio in
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complete detail right let's look at the
multiplier of some sectors so that we
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have some idea regarding the same now
this are some of the companies which are
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in the sector of auto manufacturing and
we have couple of example let's look at
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the multiplier of some of the prominent
auto manufacturers we have Ford Motors
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we have a fiat General Motors Honda
Ferrari Toyota Motors and Tesla a very
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famous one and in Tata Motors what we
know to be here that the equity
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multiplier over here of Ferrari is
11.85x so as per our
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our this relation the ratio over here
seems to be higher so the financial
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leverage should be low in the scenario
right whereas the multiplier of if you
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see Honda which is 2.60X
which is the lowest among the group of
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automobile sector then you
consider that the financial leverage of
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this company is higher right and overall
overall we know that the multiplier is
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relatively higher for the sector you can
see 8,5,5,11,2,2,4
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so relatively the numbers are
quite higher now the next sort of
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example that we are going to consider is
the internet contained companies example
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we will be looking at the multipliers
for the intent companies there are a
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couple of companies that we have is
Baidu care.com we have Facebook
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we have phoenix new media GoDaddy
alphabet we have JD.com snap
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Shutterstock Twitter and Yelp
right so what we know over here is that
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the Piggy's like you know the Facebook
has close enough to 1.10x
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right and Twitter which is close enough
to the Twitter go yeah 1.49x
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and alphabet is having close
enough to 1.20x which
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have a low equity multiplier the GoDaddy
has the highest level of the equity
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multiplier which is standard standing at
the 6.73x and that of
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Yelp and that the Facebook has the
lowest level of the multiplier which is
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standing at 1.10x now
this are the list of the global banks
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I'm talking about the Bulge brackets
like Bank of America Merrill Lynch
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Barclays Bank of Montreal nova Scotia
Citigroup
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CIBC Credit Suisse Group East West Bank
Corp HSBC and so on and so forth the
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overall we note that the global banks
have the asset to the shareholders
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equity and in most cases the multiplier
is you can see above 10x or close to in
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the neighborhood of 10x if you see
JPMorgan has equity multiplier of
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9.80 while say Citigroup has
the equity multiplier standing at
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7.96 which is the lowest among
the group the next sort of industry that
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will pick up is the discounting stores
as you can see there are big lots
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company I mean that the Costco Dollar
General
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Fred's mart Ollie's Target Tuesday morning Walmart stores and so on and so forth
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the overall equity multiplier is
standing close enough in the
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neighborhood of 1.5 to 3.5 X and the
target has the highest multiplier
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standing at 3.42 - yeah that's of target
whereas the owners bargain outlet has
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the lowest that is 1.6 X I hope you have
got a great idea regarding the equity
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multiplier ratio so that's it for this
particular topic if you have learned and
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