Debt to Equity ratio measures which of the following?

Debt to Equity ratio measures which of the following?

• A. Measures liquidity compared to equity
• B. Measures leverage compared to equity
• C. Higher risk of failed repayment
• D. Average 7:1 for lessors

Answer: (B)

Debt to equity ratio measures leverage relative to equity. It compares total debt to shareholders' equity, showing how much debt is used to finance assets per dollar of equity. A higher ratio means more debt per unit of equity, signaling greater financial leverage and usually higher risk if earnings fluctuate. A lower ratio indicates less leverage and a bigger cushion against downturns. This metric isn’t about liquidity—the ability to cover short-term obligations—and it doesn’t directly state the likelihood of repayment failure, though greater leverage can increase that risk. The idea of a fixed 7:1 benchmark for lessors isn’t a standard measure.

Debt to equity ratio measures leverage relative to equity. It compares total debt to shareholders' equity, showing how much debt is used to finance assets per dollar of equity. A higher ratio means more debt per unit of equity, signaling greater financial leverage and usually higher risk if earnings fluctuate. A lower ratio indicates less leverage and a bigger cushion against downturns. This metric isn’t about liquidity—the ability to cover short-term obligations—and it doesn’t directly state the likelihood of repayment failure, though greater leverage can increase that risk. The idea of a fixed 7:1 benchmark for lessors isn’t a standard measure.