Which financial ratio is calculated by dividing a company's total debt by its total equity?

• A. Current Ratio
• B. Debt to Equity Ratio
• C. Gross Profit Margin
• D. Return on Equity

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of financial ratios. Financial ratios are used to evaluate a company's financial performance and position. The Debt to Equity Ratio specifically measures the proportion of debt financing relative to equity financing.
2. Step 2: Identify the formula for the Debt to Equity Ratio. The formula is: $\frac{\mathrm{Total\; Debt}}{\mathrm{Total\; Equity}}$. This ratio helps assess the financial leverage of a company.
3. Step 3: Compare the given options. The Current Ratio measures liquidity, Gross Profit Margin measures profitability, and Return on Equity measures the return generated on shareholders' equity. None of these options relate to the proportion of debt to equity.
4. Step 4: Recognize that the Debt to Equity Ratio is the correct answer because it directly involves dividing total debt by total equity, as stated in the problem.
5. Step 5: Apply this understanding to similar problems by identifying the relevant formula and ensuring the calculation aligns with the financial concept being tested.