Ivy Tech Accounting 101 Final Practice Exam 2026 - Free Accounting 101 Practice Questions and Study Guide

Debt-to-equity ratio shows how much of a company is financed with debt versus equity. A high ratio means more debt relative to equity, which indicates higher financial leverage. When a company relies more on debt, it has to cover fixed interest and principal payments, even if its profits dip, which increases financial risk. Leverage can boost returns in strong times, but it also magnifies losses when earnings fall, making the overall risk profile higher. This metric doesn’t by itself prove higher profitability, and it doesn’t directly measure liquidity, which is about the ability to meet short-term obligations with available cash or liquid assets. So a high debt-to-equity ratio best signals higher financial leverage and risk.