The debt to equity ratio indicates the relative proportion of shareholders' equity and debt used to finance a company's assets, reflecting its financial leverage.
Questions & Step-by-step Solutions
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Q: What does the debt to equity ratio indicate?
Solution: The debt to equity ratio indicates the relative proportion of shareholders' equity and debt used to finance a company's assets, reflecting its financial leverage.
Steps: 5
Step 1: Understand that a company needs money to operate and grow.
Step 2: Recognize that a company can get this money in two main ways: through borrowing (debt) or from its owners (equity).
Step 3: Know that the debt to equity ratio is a number that compares how much money a company has borrowed to how much money the owners have invested.
Step 4: Realize that a higher debt to equity ratio means the company relies more on borrowed money, which can be riskier.
Step 5: Understand that a lower debt to equity ratio means the company is using more of its own money, which is generally seen as safer.
