Equity Multiplier: Understanding the Relationship between ROA, ROE, and Total Assets

What is the firm's equity multiplier based on the given data?

If ROA = 22.6% and ROE = 45.1%, what is the equity multiplier?

Equity Multiplier Calculation:

The equity multiplier, calculated by dividing ROE by ROA, measures the amount of a firm's total assets financed by equity. Given an ROE of 45.1% and an ROA of 22.6%, the firm's equity multiplier is rounded off to 2.00.

The equity multiplier is a financial metric used to determine how much of a company's assets are financed by equity. In this case, with an ROE of 45.1% and an ROA of 22.6%, we can calculate the equity multiplier by dividing ROE by ROA.

The formula for the equity multiplier is: Equity Multiplier = ROE / ROA. By substituting the given values into the formula, we get Equity Multiplier = 45.1% / 22.6% = 1.9956. However, since we need to round the answer to two decimal places, the final equity multiplier is 2.00.

Understanding the relationship between ROA, ROE, and the equity multiplier is crucial for assessing a company's financial leverage and how it funds its operations. A higher equity multiplier indicates that more of the company's assets are financed by equity, while a lower ratio suggests a greater reliance on debt.

By analyzing these financial metrics, investors and analysts can gain insights into a company's capital structure and risk profile. The equity multiplier is just one of the many tools used to evaluate a firm's financial health and performance.