Which ratio measures the relationship between total debt and the owners' equity?

• A. Current Ratio
• B. Debt Ratio
• C. Debt-to-Equity Ratio
• D. Return on Equity

Answer: (C)

This measures how a company finances its operations by comparing debt to the owners' equity. It’s computed as total debt divided by owners' equity, where total debt includes all interest-bearing obligations (short-term and long-term) and owners' equity is the residual interest after liabilities. A higher value indicates more leverage and higher financial risk because debt must be serviced regardless of earnings. The other ratios address different ideas: the current ratio looks at short-term liquidity (current assets over current liabilities); the debt ratio shows how much of the assets are financed by debt (total liabilities over total assets); and return on equity assesses profitability relative to owners' equity.