Debt to Equity is a leverage ratio that measures the relationship between debt funding and owner funding.

Debt to Equity is a leverage ratio that measures the relationship between debt funding and owner funding.

• A. Debt to Equity measures debt funding relative to owner funding.
• B. It measures a company’s liquidity in meeting short-term obligations.
• C. It compares total assets to total equity.
• D. It indicates how efficiently assets are used.

Answer: (A)

Debt to equity is a leverage measure that shows how a company funds its operations with debt versus owner (equity) funding. It is calculated as total debt divided by total equity, so it directly expresses the amount of debt funding relative to owner funding. A higher ratio signals more financial leverage and greater risk because more financing comes from debt. This metric does not assess liquidity for short-term obligations (that would be liquidity ratios like the current or quick ratio), nor does it compare total assets to total equity (that would be asset or solvency-type metrics), nor does it indicate how efficiently assets are used (that’s asset turnover). So describing it as a measure of debt funding relative to owner funding is the best fit.

Debt to equity is a leverage measure that shows how a company funds its operations with debt versus owner (equity) funding. It is calculated as total debt divided by total equity, so it directly expresses the amount of debt funding relative to owner funding. A higher ratio signals more financial leverage and greater risk because more financing comes from debt. This metric does not assess liquidity for short-term obligations (that would be liquidity ratios like the current or quick ratio), nor does it compare total assets to total equity (that would be asset or solvency-type metrics), nor does it indicate how efficiently assets are used (that’s asset turnover). So describing it as a measure of debt funding relative to owner funding is the best fit.