University of Central Florida (UCF) FIN3403 Business Finance Practice Exam 1

A high debt-to-equity ratio indicates that a company is heavily financed by debt compared to equity. This financial metric shows the proportion of a company's financing that comes from debt (loans, bonds, etc.) relative to the equity (ownership interest from shareholders). When this ratio is high, it suggests that the company is relying more on borrowing to fund its operations and growth rather than using shareholders' equity.

This reliance on debt can have several implications for the business. For one, it may indicate that the company is seeking to leverage its investments to achieve higher returns, but it also brings greater risk, as debt must be repaid regardless of the company’s financial performance. Consequently, a high debt-to-equity ratio can signal potential financial instability, especially if cash flows are insufficient to meet debt obligations.

Understanding this metric is essential for investors and analysts, as it provides insights into the company's financial structure and risk profile.