Effect of the equity multiplier indicator in companies according to sectors

Lenka Lízalová and Petra Kozáková
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Lenka Lízalová: Department of Economics Studies, College of Polytechnics Jihlava, Tolstého 16, 586 01 Jihlava, Czech Republic
Petra Kozáková: Department of Economics Studies, College of Polytechnics Jihlava, Tolstého 16, 586 01 Jihlava, Czech Republic

Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 2013, vol. 61, issue 2, 385-392

Abstract: Managers carry out the demand of the owners to maximise the rentability of invested capital with regards to the taken risk. The tool that evaluates the suitability to indebt in order to reach a higher rentability is the equity multiplier indicator. An analysis of the multiplier was carried out on 10 years of data from 456 Czech companies. Based on the data from these companies the influence of two components of the multiplier, which characterise the influence of indebtedness on the return on equity, was analysed. These components are "financial leverage" and "interest burden", these having an antagonistic effect. The low variability of the equity multiplier is apparent in the companies of the administrative and support service sector and it is also relatively low in the companies of the agriculture, forestry and fishing sector; on the contrary, in for example the professional, scientific and technical activities and the sector of water, sewage and waste there are companies with higher variability of the equity multiplier. The paper identifies companies (in view of their sector specialization) inclining to a larger utility of debts to increase the return on equity. The largest equity is reached in companies of the construction sector; the lowest effect of the multiplier is to be found in companies of the agriculture sector. The resulting value of the multiplier is to a large extent determined by the financial leverage indicator, to a lower extent and at the same time negatively by the interest burden indicator.

Keywords: indebtedness; financial leverage; equity multiplier; ROE (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:mup:actaun:actaun_2013061020385

DOI: 10.11118/actaun201361020385

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