Home › US CMA Part 2 › Financial Management › Using Financial Information and Accounting › How is the debt-to-equity ratio calculated, and …
How is the debt-to-equity ratio calculated, and which direction is generally better?
AOwners' equity over total liabilities, and higher is better
BTotal liabilities over owners' equity, and lower is better
CTotal liabilities over total assets, and higher is better
DLong-term debt over total assets, and lower is better
Answer & Solution
Correct answer: B. Total liabilities over owners' equity, and lower is better
1. Debt ratios measure the degree and effect of a firm's use of borrowed funds to finance operations.
2. The most important of them is the debt-to-equity ratio.
3. It measures the relationship between the amount of debt financing and the amount of equity financing, and is found by dividing total liabilities by owners' equity.
4. In general, the lower the ratio, the better, because heavy reliance on debt can leave a firm struggling to meet interest payments and repay loans.
5. Past values and industry averages still have to be weighed, so a single reading settles nothing by itself.
_Source: OpenStax Introduction to Business (CC BY 4.0), Ch 14 "Using Financial Information and Accounting", section 14.7 Analyzing Financial Statements_
Related questions
What does a debt-to-equity ratio above 100 percent tell you about who is funding the firm?A bakery reports total liabilities of $70,150 and owners' equity of $78,750. What is its dWhy can no single inventory turnover value be called good for every firm?Cost of goods sold was $112,500, beginning inventory was $18,000 and ending inventory was How is the inventory turnover ratio calculated?What do activity ratios reflect?A bakery earned a net profit of $32,175 and has 10,000 shares of common stock outstanding.Earnings per share tells an investor what?