In financial terms, what is an equity multiplier?

An equity multiplier is a financial metric that indicates how much of a company's assets are financed by its equity. It is calculated by taking the total assets of a company and dividing it by the total equity. This ratio helps assess the degree of leverage that a company is using; a higher equity multiplier suggests that a greater portion of asset financing is coming from equity, which can indicate a lower level of debt in the capital structure.

This concept is important because it sheds light on the financial structure and risk of a business. Investors and analysts use the equity multiplier to understand how well a firm is leveraging its equity to generate assets, and this can provide insights into the potential for growth as well as the risks associated with high leverage.