The Debt to Equity Ratio is calculated as

• A. Total assets divided by stockholders' equity
• B. Total equity divided by total liabilities
• C. Total liabilities divided by stockholders' equity
• D. Revenue divided by expenses

Answer: (C)

Debt to equity ratio shows how much of a company’s financing comes from debt compared with the money owners have invested. It is calculated by dividing total liabilities by stockholders’ equity. This makes sense because liabilities represent the company’s obligations (the debt) and stockholders’ equity represents the owners’ claim after those debts are paid. The ratio tells you how leveraged the business is—more debt per dollar of equity means higher financial risk if cash flow tightens. For example, if liabilities are $500,000 and equity is $250,000, the debt-to-equity ratio is 2.0, meaning there are two dollars of debt for every one dollar of equity.

The other options don’t measure the ratio of debt to owners’ funds. Total assets divided by stockholders’ equity would reflect how much of all assets are financed by equity (an asset-to-equity view, not specifically debt). Total equity divided by total liabilities would produce the inverse of the debt-to-equity concept and isn’t the standard measure of leverage. Revenue divided by expenses is a profitability (operating efficiency) metric, not a leverage ratio.