Debt to Equity Ratio is defined as which of the following?

• A. Total Debt / Total Equity
• B. Total Equity / Total Debt
• C. Net Income / Total Assets
• D. Total Liabilities / Total Assets

Answer: (A)

This measures financial leverage by comparing what the company owes to what the owners have invested. Debt to equity shows how many dollars of debt exist for every dollar of equity, highlighting how heavily financed the company is with debt versus owners’ funds. The standard formula matches this idea: total debt divided by total equity, where debt means interest-bearing obligations and equity is the shareholders’ investment.

Why this is the best fit: it directly expresses the balance between debt and equity, revealing leverage and financial risk.

The other options describe different ideas: equity divided by debt would be the inverse, not the leverage level; net income divided by total assets is a profitability measure (return on assets); liabilities divided by assets is a debt-to-assets measure, which is a related but distinct way to assess leverage that includes all liabilities rather than focusing on debt relative to equity.