Ace the AFP Exam 2026 – Boost Your Financial Wizardry!

Question: 1 / 400

What does the debt-to-equity ratio indicate?

The average cost of capital

The risk level of a company compared to its competitors

The proportion of a company’s debt financing relative to its equity

The debt-to-equity ratio is a financial metric that specifically measures the proportion of a company’s debt financing relative to its equity. This ratio is essential for assessing a company's capital structure and financial leverage. A higher ratio suggests that a company is heavily financed by debt, which may indicate higher risk if it cannot meet its debt obligations. Conversely, a lower ratio implies that a company is more equity-financed, which may be viewed as a sign of financial stability.

Understanding the debt-to-equity ratio helps stakeholders evaluate how much leverage a company is using to finance its operations and growth. This information is particularly useful for investors and creditors, who use this metric to assess risk and make informed decisions regarding investments and lending. The clarity provided by this ratio highlights its importance in analyzing a company's financial strategy and risk profile.

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The overall financial health of a company

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