Which ratio compares total liabilities to owner's equity?

Which ratio compares total liabilities to owner's equity?

• A. Current ratio
• B. Debt/equity ratio
• C. Asset turnover
• D. Liquidity ratio

Answer: (B)

Debt-to-equity ratio expresses how a company is financed by creditors versus the owner. It compares total liabilities to owner's equity, showing the level of financial leverage the business uses. The higher this ratio, the more the company relies on debt relative to the owner's investment, which implies higher financial risk if profits fall or interest costs rise. Current ratio, by contrast, looks at short-term liquidity by comparing current assets to current liabilities, not the balance between liabilities and equity. Asset turnover measures how efficiently assets generate sales, not how financing is split. The liquidity ratio category covers measures of the ability to meet short-term obligations, again not the debt-to-equity relationship.

Debt-to-equity ratio expresses how a company is financed by creditors versus the owner. It compares total liabilities to owner's equity, showing the level of financial leverage the business uses. The higher this ratio, the more the company relies on debt relative to the owner's investment, which implies higher financial risk if profits fall or interest costs rise.

Current ratio, by contrast, looks at short-term liquidity by comparing current assets to current liabilities, not the balance between liabilities and equity. Asset turnover measures how efficiently assets generate sales, not how financing is split. The liquidity ratio category covers measures of the ability to meet short-term obligations, again not the debt-to-equity relationship.