A higher leverage ratio means that:

Question

Quizplus · Accepted Answer

A higher leverage ratio means that the firm has more debt relative to its equity, which increases the firm’s financial risk. The higher the leverage ratio, the more the firm is relying on borrowed funds and the greater the risk of becoming insolvent. Therefore, option D is the correct answer. Option A is incorrect because a higher leverage ratio actually indicates a higher risk of defaulting on loans. Option B is true only when the leverage ratio is greater than 1. Option C is irrelevant to the concept of leverage ratio.

A Higher Leverage Ratio Means That