DECA Retail Merchandising Practice Exam

What is currently considered a financial measure of a company's debt compared to its equity?

1. Current ratio

2. Debt-to-equity ratio

3. Asset turnover

4. Inventory turnover

The correct answer is: Debt-to-equity ratio

The debt-to-equity ratio is a key financial measure that evaluates a company's financial leverage by comparing its total liabilities to its shareholder equity. This ratio provides insight into how much debt a company is using to finance its operations relative to the equity provided by shareholders. A higher debt-to-equity ratio indicates that a company relies more on borrowed funds, which can suggest higher risk, particularly in economic downturns. Conversely, a lower ratio might imply a more conservative approach with less reliance on debt. Other options like the current ratio focus on liquidity and the firm's ability to cover short-term liabilities with short-term assets, while asset turnover measures the efficiency of a company in generating sales from its assets. Inventory turnover evaluates how quickly a company sells its inventory within a given period. None of these alternatives specifically address the relationship between a company's debt and equity, making the debt-to-equity ratio the most relevant choice in this context.