The Equity Multiplier is a number used to compare companies, arrived at by dividing total assets by owner’s equity, and it gives an idea of what proportion of the company’s assets have been financed through equity vs debt.
In general a low Equity Multiplier is a good sign because it means that a higher proportion of equity has been used to acquire assets, as opposed to funding assets with debt. However, the absence of significant debt could mean that the company lacked the credit rating to issue debt or take out loans.
It is computed by dividing the total Assets by the Shareholders Equity. The Multiplier is an alternative to the Debt / Equity Ratio, and can be used as a comparison tool between companies in the same sector, where it can reveal capital structures that are out of the norm for a sector and allow the investor or analyst the opportunity to consider why that is.
It should not be used across industries or disparate sectors, however, because different industries have different capital structures and debt/equity ratios that suit them; the Enterprise Multiple, another name for EV/EBITDA (Enterprise Value over Earnings Before Interest Tax Depreciation and Amortization), is a better tool for that.