Which statement correctly describes the debt/equity ratio?

Which statement correctly describes the debt/equity ratio?

• A. Total assets divided by total equity
• B. Total liabilities divided by total owner's equity
• C. Total assets divided by total liabilities
• D. Total liabilities divided by total assets

Answer: (B)

The debt/equity ratio measures financial leverage by comparing what the business owes to what the owners have invested. It is calculated as total liabilities divided by total owner's equity, showing how many dollars of debt exist for every dollar of owner's equity. A higher ratio indicates more leverage and greater financial risk, while a lower ratio suggests less reliance on debt. For example, if liabilities are $200,000 and owner's equity is $100,000, the ratio would be 2.0, meaning $2 of debt for every $1 of owner's equity. The other formulas describe different measures: total assets divided by total owner's equity is the equity multiplier, total assets divided by total liabilities reflects a different solvency view, and liabilities divided by assets is a debt ratio that shows how much of assets are financed by debt rather than equity.

The debt/equity ratio measures financial leverage by comparing what the business owes to what the owners have invested. It is calculated as total liabilities divided by total owner's equity, showing how many dollars of debt exist for every dollar of owner's equity. A higher ratio indicates more leverage and greater financial risk, while a lower ratio suggests less reliance on debt. For example, if liabilities are $200,000 and owner's equity is $100,000, the ratio would be 2.0, meaning $2 of debt for every $1 of owner's equity. The other formulas describe different measures: total assets divided by total owner's equity is the equity multiplier, total assets divided by total liabilities reflects a different solvency view, and liabilities divided by assets is a debt ratio that shows how much of assets are financed by debt rather than equity.