What is the debt-to-equity ratio?

• A. Total Equity / Total Liabilities
• B. Total Assets / Total Equity
• C. Total Liabilities / Total Equity
• D. Total Assets / Total Liabilities

Answer: (C)

The debt-to-equity ratio shows how a company funds its operations with debt relative to what the owners have invested. It is calculated by dividing total liabilities by total equity. Liabilities include all obligations the company owes, while equity represents the owners’ claim after debts. This ratio measures leverage and financial risk: a higher number means more debt financing compared to equity, implying greater leverage; a lower number means the company relies more on owner funds.

Other formulas mix in assets or swap the numerator and denominator, which describe different relationships (like how much of the company’s financing is provided by assets or by equity alone) and don’t specifically measure debt against equity. For example, using total assets in the numerator would assess leverage differently, and dividing equity by liabilities would invert the perspective.