DECA Retail Merchandising Practice Exam

What does a low total liabilities to stockholders equity ratio indicate?

1. A higher financial risk

2. Strong financial leverage

3. A lower financial risk

4. Weak profitability

The correct answer is: A lower financial risk

A low total liabilities to stockholders equity ratio indicates a lower financial risk because it suggests that a company is less dependent on debt to finance its operations. In this ratio, total liabilities represent what the company owes, while stockholders' equity represents the owner's stake in the company. When this ratio is low, it means that the proportion of debt in comparison to equity is small, indicating that the company is financed more through equity than through borrowing. This financial structure typically signals to investors and creditors that the company is in a stable position with a lower risk of insolvency, as it has less debt to repay in the event of financial difficulties. A lower financial risk implies that the company's operations are less susceptible to the fluctuations and pressures that can come from high levels of debt, thereby enhancing the overall perception of financial health and stability.