Which ratio is used to assess a company's leverage by comparing total debt to total assets?

Which ratio is used to assess a company's leverage by comparing total debt to total assets?

• A. Debt-to-Equity Ratio
• B. Debt Ratio
• C. Current Ratio
• D. Quick Ratio

Answer: (B)

Measuring leverage means looking at how much of a company’s assets are funded with debt. The debt ratio does this directly by dividing total debt by total assets, showing the portion of assets financed with borrowed funds. A higher debt ratio indicates greater leverage and often higher financial risk, since more assets are funded by debt and must generate returns to cover interest and principal payments. Debt-to-equity ratio, by contrast, compares debt to owners’ equity, not to total assets, so it highlights the balance between borrowed funds and the owners’ stake rather than the asset base funded by debt. Current ratio and quick ratio are liquidity measures that assess the ability to meet short-term obligations, not the extent of leverage relative to total assets.

Measuring leverage means looking at how much of a company’s assets are funded with debt. The debt ratio does this directly by dividing total debt by total assets, showing the portion of assets financed with borrowed funds. A higher debt ratio indicates greater leverage and often higher financial risk, since more assets are funded by debt and must generate returns to cover interest and principal payments.

Debt-to-equity ratio, by contrast, compares debt to owners’ equity, not to total assets, so it highlights the balance between borrowed funds and the owners’ stake rather than the asset base funded by debt. Current ratio and quick ratio are liquidity measures that assess the ability to meet short-term obligations, not the extent of leverage relative to total assets.