Which metric measures the portion of a company financed by debt versus equity?

Which metric measures the portion of a company financed by debt versus equity?

• A. Current Ratio
• B. Debt to Equity
• C. Quick Ratio
• D. Return on Equity

Answer: (B)

Leverage and capital structure are about how a company funds its activities with borrowed funds versus owners’ funds. The debt-to-equity ratio captures this mix by comparing total debt to shareholders’ equity. It shows how many dollars of debt there are for every dollar of equity, revealing how heavily the company relies on debt financing. A higher ratio signals more debt financing and greater financial risk, while a lower ratio indicates more equity financing and typically lower risk. The other metrics focus on liquidity (current and quick ratios) or profitability relative to equity (return on equity), not on the financing mix.

Leverage and capital structure are about how a company funds its activities with borrowed funds versus owners’ funds. The debt-to-equity ratio captures this mix by comparing total debt to shareholders’ equity. It shows how many dollars of debt there are for every dollar of equity, revealing how heavily the company relies on debt financing. A higher ratio signals more debt financing and greater financial risk, while a lower ratio indicates more equity financing and typically lower risk. The other metrics focus on liquidity (current and quick ratios) or profitability relative to equity (return on equity), not on the financing mix.