Which ratio measures the proportion of a company's total liabilities to its shareholders' equity?

• A. Return on Equity
• B. Current Ratio
• C. Debt to Equity Ratio
• D. Inventory Turnover 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 total liabilities (debt) to its shareholders' equity. It is a key indicator of financial leverage and risk.
2. Step 2: Recall the formula for the Debt to Equity Ratio: \( \text{Debt to Equity Ratio} = \frac{\text{Total Liabilities}}{\text{Shareholders' Equity}} \). This formula expresses how much debt the company is using to finance its assets relative to the equity provided by shareholders.
3. Step 3: Compare the Debt to Equity Ratio with other ratios mentioned in the problem: Return on Equity measures profitability, Current Ratio measures liquidity, and Inventory Turnover Ratio measures efficiency in managing inventory. None of these directly measure the proportion of liabilities to equity.
4. Step 4: Recognize that the Debt to Equity Ratio is the correct answer because it specifically addresses the relationship between liabilities and shareholders' equity, which is the focus of the question.
5. Step 5: Apply this understanding in practice by calculating the Debt to Equity Ratio for a company using its financial statements. Locate the Total Liabilities and Shareholders' Equity on the balance sheet, and use the formula to compute the ratio.