What is the function of leverage ratios?
A) They indicate an organization's operational efficiency.
B) They indicate how well an organization is being managed.
C) They measure the magnitude of owners' and creditors' claims on the organization.
D) They evaluate how effectively an organization is managing some of its basic operations.
E) They judge how well an organization will be able to meet its short-term financial goals.

Question

Quizplus · Accepted Answer

Leverage ratios are used to measure the extent to which a company's operations are financed by external sources such as creditors and shareholders. These ratios evaluate the degree to which a company has borrowed money and its ability to pay back the debt. So, the leverage ratios measure the magnitude of the owner's and creditor's claims on the organization. Therefore, option C is the correct answer. A, B, D, and E are incorrect as these do not define the function of leverage ratios.

What Is the Function of Leverage Ratios