ETS Major Field Test MBA 2025 – 400 Free Practice Questions to Pass the Exam

The Debt to Equity Ratio (D/E) is a financial measure used to assess a company's financial leverage by comparing its total liabilities to its total equity. This ratio illustrates how much debt a company is using to finance its assets relative to the equity that shareholders have invested in the company.

To calculate the Debt to Equity Ratio, you divide total liabilities by total equity. This provides insight into the proportion of debt being used versus the equity, helping stakeholders understand the financial structure of the company and the risks associated with its capital financing. A higher ratio may indicate higher risk, as it suggests that a company is relying more heavily on debt to finance its growth, while a lower ratio may indicate a more conservative financial approach.

In contrast, the other options provided do not accurately describe how to compute this specific ratio. Total assets divided by total liabilities and total assets divided by total equity inherently look at the asset side of the balance sheet in relation to liabilities or equity, but they do not reflect the debt-equity relationship that the D/E ratio is designed to evaluate. Similarly, total liabilities divided by total assets focuses on understanding the proportion of assets financed by debt rather than the balance between debt and equity.