Certified Financial Management Specialist Practice Exam

In financial terminology, the D/E ratio refers to what?

1. Debt to equity ratio

2. Debt to expense ratio

3. Depreciation to equity ratio

4. Distribution to earnings ratio

The correct answer is: Debt to equity ratio

The D/E ratio, or debt to equity ratio, is a key financial metric used to measure a company's financial leverage by comparing its total liabilities to its shareholders' equity. This ratio provides insights into how much debt a company is utilizing to finance its assets relative to the equity that shareholders have invested in the company. A higher D/E ratio indicates more leverage and potentially more risk, as the company is relying more heavily on borrowed funds. In financial analysis, the debt to equity ratio is essential for investors and creditors as it helps assess the risk profile of the company. Companies with a high D/E ratio may face challenges in downturns, as they have substantial debt obligations to meet regardless of their income levels. Additionally, understanding the D/E ratio is crucial for stakeholders in evaluating a company's capital structure and its long-term financial health. It also aids in comparison with industry peers, informing decisions related to investment and lending. The other options, while they may sound plausible in a different context, do not align with the established definitions and common usage in financial analysis. For example, the debt to expense ratio and depreciation to equity ratio do not serve as widely recognized metrics in financial evaluations. Therefore, the designation of the D/E ratio as the debt to equity ratio is the