while the other half with equity. The equity multiplier is used in DuPont analysis, a method of financial assessment devised by the chemical company for its internal financial review.The DuPont modelbreaks the calculation ofreturn on equity (ROE)into three ratios:1 ...
As explained by Investopedia, the equity multiplier shows a company’s total assets per dollar of stockholders’ equity. The higher the equity multiplier, the higher is the financial leverage, which indicates that the company relies more on debt to finance its assets. Calculating Equity Multiplier ...
ROE=NPM×Asset Turnover×Equity Multiplierwhere:NPM=Net profit margin, the measure of operatingefficiencyAsset Turnover=Measure of asset use efficiencyEquity Multiplier=Measure of financial leverageROE=NPM×Asset Turnover×Equity Multiplierwhere:NPM=Net profit margin, the measure of operatingefficiencyAsset...
Financial leverage — measured by the equity multiplier The three-part DuPont analysis to calculate ROE is profit margin multiplied by asset turnover multiplied by the equity multiplier. The first part of the formula (profit margin times asset turnover) can be simplifie...
ROE =Net Profit MarginxAsset TurnoverxEquity Multiplier ROE = (Earnings Before Tax ÷ Sales) x (Sales ÷ Assets) x (Assets ÷ Equity) x (1 - Tax Rate) The Bottom Line Return on equity is an important financial metric that investors can use to determine how efficient management is at ut...