Which ratio is used to determine the relative amount of debt to equity?

The debt to equity ratio is a financial metric that provides insight into a company's capital structure by comparing the amount of debt it has to the amount of equity. This ratio is calculated by dividing total liabilities by total shareholders' equity, showing how much debt a company is using to finance its assets relative to the equity provided by its owners. A higher ratio indicates that a company is primarily financed through debt, which can imply higher financial risk but also potentially higher returns on equity if the borrowed funds are invested effectively.

Understanding the debt to equity ratio is essential for assessing financial leverage. Investors and creditors often analyze this ratio to evaluate the financial stability and risk profile of a business. A balance between debt and equity financing is crucial, as excessive reliance on debt can lead to sustainability issues during economic downturns, while too little leverage may indicate an underutilization of financial resources.

The other options, while important financial metrics, do not measure the relationship between debt and equity. The current ratio assesses short-term liquidity; return on equity measures profitability in relation to shareholders' equity; and working capital ratio focuses on a company’s ability to meet short-term liabilities with short-term assets. Thus, the debt to equity ratio specifically addresses the balance of debt versus equity in capital structure.