When dividing its total debt by its total equity, what is a company trying to measure?

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

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of the Debt-to-Equity Ratio. This ratio measures the proportion of a company's financing that comes from debt versus equity. It is calculated as Total Debt divided by Total Equity.
2. Step 2: Recognize that the Debt-to-Equity Ratio is a key indicator of financial leverage. It helps assess how much risk a company is taking by using debt to finance its operations compared to equity.
3. Step 3: Compare the Debt-to-Equity Ratio to other financial metrics mentioned in the problem, such as Asset Turnover Ratio, Return on Equity, and Current Ratio. Each of these measures different aspects of a company's financial health and performance.
4. Step 4: Note that dividing Total Debt by Total Equity specifically aligns with the formula for the Debt-to-Equity Ratio, making it the correct answer in this context.
5. Step 5: Apply this understanding to analyze a company's financial statements. Look for the Total Debt and Total Equity values in the balance sheet to calculate the Debt-to-Equity Ratio and interpret the company's financial leverage.