Certified Financial Management Specialist Practice Exam

What does the debt-to-asset ratio assess?

1. Company liquidity

2. Company profitability

3. Company debt relative to assets

4. Shareholder returns

The correct answer is: Company debt relative to assets

The debt-to-asset ratio is a financial metric that assesses the proportion of a company’s assets that are financed through debt. It is calculated by dividing total debt by total assets. This ratio gives insight into a company's financial leverage and stability by indicating the extent to which a company relies on borrowed funds to finance its operations and growth. A higher ratio suggests greater reliance on debt, which may imply higher financial risk, while a lower ratio indicates a more conservative financial structure with less risk associated with debt. Understanding this ratio is crucial for stakeholders, as it helps evaluate how effectively a company is managing its debt in relation to its total assets, which can affect decisions about investment, lending, and overall financial health.