Multiple Choice
Which of the following is a ratio used to evaluate a company's solvency?
23
views
14. Financial Statement Analysis
Ratios: Debt to Equity Ratio
Struggling with Financial Accounting?
Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
When a company divides its total debt by its total equity, what is it trying to measure?
A
Its debt to equity ratio
B
Its current ratio
C
Its gross profit margin
D
Its return on equity
Verified step by step guidance1
Understand the concept of the debt-to-equity ratio: This ratio measures the proportion of a company's financing that comes from debt versus equity. It is a key indicator of financial leverage and risk.
Identify the formula for the debt-to-equity ratio: The formula is \( \text{Debt-to-Equity Ratio} = \frac{\text{Total Debt}}{\text{Total Equity}} \). This shows how much debt exists for every dollar of equity.
Compare the given options: The debt-to-equity ratio is specifically related to measuring financial leverage, not liquidity (current ratio), profitability (gross profit margin), or return on equity.
Recognize that dividing total debt by total equity directly corresponds to the debt-to-equity ratio, as per the formula provided.
Conclude that the correct answer is 'Its debt to equity ratio,' as this calculation aligns with the definition and purpose of the ratio.
2:44mWatch next
Master Ratios: Debt to Equity Ratio with a bite sized video explanation from Brian
Start learningRelated Videos
Related Practice
Ratios: Debt to Equity Ratio practice set
Problem sets built by lead tutorsExpert video explanations