A debt-to-equity ratio around 7:1 for lessors indicates which of the following?

A debt-to-equity ratio around 7:1 for lessors indicates which of the following?

• A. High liquidity
• B. High leverage and risk
• C. Low leverage
• D. High profitability

Answer: (B)

Debt-to-equity ratio shows how a company funds its assets with debt versus owner’s equity. A ratio around 7:1 means for every dollar of equity there are seven dollars of debt, so the lessor is heavily financed with debt. That heavy use of debt creates higher fixed obligations—interest and principal payments—that must be met even if earnings dip, increasing financial risk. This ratio is not a measure of liquidity, which looks at short-term cash availability, nor does it inherently indicate low leverage or high profitability. High leverage can magnify profits when things go well, but it also raises the risk of financial distress if earnings decline or interest costs rise.

Debt-to-equity ratio shows how a company funds its assets with debt versus owner’s equity. A ratio around 7:1 means for every dollar of equity there are seven dollars of debt, so the lessor is heavily financed with debt. That heavy use of debt creates higher fixed obligations—interest and principal payments—that must be met even if earnings dip, increasing financial risk. This ratio is not a measure of liquidity, which looks at short-term cash availability, nor does it inherently indicate low leverage or high profitability. High leverage can magnify profits when things go well, but it also raises the risk of financial distress if earnings decline or interest costs rise.