What does the debt-to-equity ratio assess?

The debt-to-equity ratio is a financial metric that assesses a company's financial leverage. It is calculated by dividing a company's total liabilities by its shareholder equity. This ratio provides insight into the relative proportion of debt and equity financing a company uses to manage its operations. A higher debt-to-equity ratio indicates that a company is using more debt relative to equity, which can suggest higher financial risk, as it may be more susceptible to economic downturns or financial distress. Conversely, a lower ratio may suggest a more conservative approach to financing, potentially reflecting lower financial risk.

Understanding financial leverage is crucial for stakeholders, as it can influence a company's ability to sustain operations, invest in growth, and weather financial challenges. By examining this ratio, investors and analysts can gauge how well a company is balanced in its use of debt versus equity financing, impacting their investment decisions. Other options such as revenue growth, market share, or liquidity do not relate to the specific assessment of a company's financial structure and risk profile, which is the main focus of the debt-to-equity ratio.