How is the debt-to-owners'-equity ratio used?
A) To describe the extent to which the firm is financed through borrowed money
B) To determine how much net income the business earns for each dollar invested
C) To determine how readily the firm can meet unexpected demands for cash
D) To indicate the percentage of revenue which will be profit
E) To determine the percentage of profits paid out to debtholders

Question

Quizplus · Accepted Answer

The debt-to-owners' equity ratio is used to describe the extent to which the firm is financed through borrowed money. This ratio compares the amount of debt the company has incurred to its equity, and indicates the proportion of financing that comes from debt versus equity. A high debt-to-owners' equity ratio indicates a greater reliance on borrowed funds, which may carry higher risk and increased costs in the form of interest payments. A low ratio, on the other hand, suggests a lower level of risk and greater financial strength.

How Is the Debt-To-Owners'-Equity Ratio Used