DebttoEquity Ratio—Practice Questions
The debttoequity 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

How do you calculate the debttoequity ratio?

Which of the following statements is incorrect?
A. A high debttoequity ratio means the company has a lot of debt in relation to equity.
B. The higher the debttoequity ratio, the more debt the company has on its balance sheet.
C. The higher the debttoequity ratio, the more challenging it might be for the business to obtain debt financing.
D. The debttoequity ratio analyzes the relationship between total liabilities and total equity.
E. The higher the debttoequity ratio, the more profit the company has recorded.
Answers and explanations

Debt divided by equity
The debttoequity ratio is calculated as total debt divided by total equity.

The correct answer choice is E.
The higher the debttoequity ratio, the higher the debt balance. Profit increases retained earnings and equity. Therefore, a higher profit would actually decrease this ratio.
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