Which ratio directly measures the proportion of financing that comes from creditors compared to owners?

Which ratio directly measures the proportion of financing that comes from creditors compared to owners?

• A. DEBT-TO-EQUITY RATIO CALCULATION
• B. CURRENT RATIO
• C. LIQUIDITY RATIO
• D. RETURN ON EQUITY

Answer: (A)

Understanding how a company is financed—how much comes from creditors versus owners—is measured by the debt-to-equity ratio. This ratio compares total liabilities (what the company owes) to shareholders’ equity (the owners’ investment). It shows how heavily financed the business is with debt relative to owner funding. A higher ratio means more debt financing compared with equity, highlighting leverage and potential risk. For example, if a company has $600,000 in liabilities and $400,000 in equity, the debt-to-equity ratio is 1.5, meaning there is $1.50 of debt for every $1 of equity. This directly reflects the financing mix: more from creditors than from owners. The other options don’t capture the financing mix. The current ratio and other liquidity ratios assess short-term ability to meet obligations, not where the funds come from. Return on equity measures profitability generated from equity, not how the business is financed.

Understanding how a company is financed—how much comes from creditors versus owners—is measured by the debt-to-equity ratio. This ratio compares total liabilities (what the company owes) to shareholders’ equity (the owners’ investment). It shows how heavily financed the business is with debt relative to owner funding. A higher ratio means more debt financing compared with equity, highlighting leverage and potential risk.

For example, if a company has $600,000 in liabilities and $400,000 in equity, the debt-to-equity ratio is 1.5, meaning there is $1.50 of debt for every $1 of equity. This directly reflects the financing mix: more from creditors than from owners.

The other options don’t capture the financing mix. The current ratio and other liquidity ratios assess short-term ability to meet obligations, not where the funds come from. Return on equity measures profitability generated from equity, not how the business is financed.