If a company has a debt to equity ratio of 1.5, what does this indicate?
Practice Questions
Q1
If a company has a debt to equity ratio of 1.5, what does this indicate?
The company has more equity than debt
The company has more debt than equity
The company is fully financed by equity
The company has no debt
Questions & Step-by-Step Solutions
If a company has a debt to equity ratio of 1.5, what does this indicate?
Step 1: Understand what 'debt' means. Debt is money that the company owes to others.
Step 2: Understand what 'equity' means. Equity is the money that the owners or shareholders have invested in the company.
Step 3: Know what the debt to equity ratio is. It compares the total debt of the company to its total equity.
Step 4: A debt to equity ratio of 1.5 means that for every 1 unit of equity, the company has 1.5 units of debt.
Step 5: This indicates that the company relies more on borrowed money (debt) than on its own money (equity) to finance its operations.
Debt to Equity Ratio – A financial metric that compares a company's total debt to its total equity, indicating the proportion of debt used to finance the company's assets.
