Total assets/equity measures ________.
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A. B. C. D.A
Total assets divided by equity measures financial leverage.
The measure that is represented by the ratio of total assets to equity is known as financial leverage.
Financial leverage is a ratio that assesses the extent to which a company relies on debt financing to support its operations and growth. It reflects the proportion of a company's assets that are funded by its owners (equity) compared to the proportion funded by creditors (debt).
The formula for the financial leverage ratio is:
Financial Leverage = Total Assets / Equity
By dividing total assets by equity, the ratio quantifies the degree to which a company's assets are financed through debt compared to the capital invested by shareholders.
Interpreting the financial leverage ratio involves understanding the implications of its value. If the ratio is greater than 1, it indicates that a company has more debt relative to equity. This suggests that the company is highly leveraged, meaning it has a higher financial risk as it relies more on borrowed funds. On the other hand, if the ratio is less than 1, it implies that equity is the predominant source of financing, indicating lower financial risk.
Financial leverage affects a company's risk and return profile. Higher financial leverage amplifies both profits and losses. When a company generates higher returns, shareholders benefit from magnified gains. However, if the company experiences losses or faces difficulties in meeting its debt obligations, shareholders may suffer significant losses.
In summary, the ratio of total assets to equity, or the financial leverage ratio, measures the extent to which a company uses debt financing compared to equity financing. It provides insights into the risk profile of the company and its dependence on borrowed funds to support its operations and growth.