The debt-to-equity ratio tells you how much debt a company has in relation to its equity. So, which is better: a higher or a lower ratio? If you think you know, then you can test your knowledge with the following practice questions.

Practice questions

  1. How do you calculate the debt-to-equity ratio?

  2. Which of the following statements is incorrect?

    A. A high debt-to-equity ratio means the company has a lot of debt in relation to equity.

    B. The higher the debt-to-equity ratio, the more debt the company has on its balance sheet.

    C. The higher the debt-to-equity ratio, the more challenging it might be for the business to obtain debt financing.

    D. The debt-to-equity ratio analyzes the relationship between total liabilities and total equity.

    E. The higher the debt-to-equity ratio, the more profit the company has recorded.

Answers and explanations

  1. Debt divided by equity

    The debt-to-equity ratio is calculated as total debt divided by total equity.

  2. The correct answer choice is E.

    The higher the debt-to-equity ratio, the higher the debt balance. Profit increases retained earnings and equity. Therefore, a higher profit would actually decrease this ratio.

If you need more practice on this and other topics from your accounting course, visit to purchase Accounting For Dummies! Featuring the latest information on accounting methods and standards, the information in Accounting For Dummies is valuable for anyone studying or working in the fields of accounting or finance.

About This Article

This article is from the book:

About the book authors:

Kenneth Boyd is the owner of St. Louis Test Preparation ( He provides online tutoring in accounting and finance. Kenneth has worked as a CPA, Auditor, Tax Preparer, and College Professor. He is the author of CPA Exam For Dummies. Kate Mooney has been teaching accounting to both undergraduates and MBA students at St. Cloud State University since 1986, after earning her PhD from Texas A & M University. She is a licensed CPA in Minnesota and is a member of the State Board of Accountancy.

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