What is the equity multiplier, and why is it used?

Here is a tip:

Most companies should use debt and equity to fund operations and growth. Not using any leverage could put the company at a disadvantage compared with its peers.

Explanation

The equity multiplier, or financial leverage, is an indirect analysis of a firm's use of debt to finance its assets. When a company borrows to purchase assets, the ratio will increase.
 
The accounts used to calculate financial leverage are both on the balance sheet. Analysts will divide total assets by total equity.
 

Verified Answer

The equity multiplier is a component of the DuPont equation:
 
Equity Multiplier = Total Assets / Total Common Equity