To calculate the profit multiplier:
\[ PM = \frac{NI}{E} \]
Where:
The profit multiplier is a financial ratio that measures the return on equity. It indicates how many dollars of profit a company generates with each dollar of shareholders' equity. A higher profit multiplier suggests a more efficient use of equity in generating profit.
Example 1: If the net income is $50,000 and the equity is $200,000:
Using the formula:
\[ PM = \frac{50{,}000}{200{,}000} = 0.25 \]
So, the profit multiplier is 0.25.
Example 2: If the net income is $120,000 and the equity is $400,000:
Using the formula:
\[ PM = \frac{120{,}000}{400{,}000} = 0.30 \]
So, the profit multiplier is 0.30.
