The debt ratio is used:
A) To determine how much debt a firm should pay off.
B) To measure the ratio of equity to expenses.
C) To determine how much debt a company should borrow.
D) To assess the risk associated with a company's use of liabilities.
E) Only by banks when a business applies for a loan.

Question

Quizplus · Accepted Answer

The debt ratio is used to assess the risk associated with a company's use of liabilities. It measures the percentage of a company's assets that are financed by debt, hence giving an idea of its debt burden and its capacity to repay its debt obligations. The higher the debt ratio, the higher the financial risk associated with the company. The debt ratio is not used to determine how much debt a firm should pay off or borrow, nor is it related to equity or expenses. While banks may use the debt ratio when evaluating a loan application, it is not exclusively used by them.

The Debt Ratio Is Used