The debt to equity ratio indicates:
A) The margin of safety provided to creditors.
B) The extent of "trading on the equity" or financial leverage.
C) Profitability without regard to how resources are financed.
D) The effectiveness of employing resources provided by owners.

Question

Quizplus · Accepted Answer

The debt to equity ratio measures the proportion of a company's financing that comes from debt (or liabilities) compared to equity (or owners' investment). A higher debt to equity ratio indicates that the company is relying more on debt rather than equity to finance its operations, which means it is more highly leveraged. This can increase the returns to equity holders if the company is able to generate higher profits with the borrowed money, but it also increases the risk to equity holders if the company is not able to repay the debt. Therefore, the debt to equity ratio is a measure of the extent of "trading on the equity" or financial leverage.

The Debt to Equity Ratio Indicates