Measures a firm's reliance on borrowed funds.

Measures a firm's reliance on borrowed funds.

• A. Activity Ratios
• B. Leverage (Debt) Ratios
• C. Liquidity Ratios
• D. Profitability Ratios

Answer: (B)

Measuring a firm's reliance on borrowed funds is about leverage. Leverage ratios quantify how much of the firm’s financing comes from debt versus equity or total assets, showing how heavily the company leans on borrowed money. By examining metrics like debt-to-equity and debt-to-assets, you can assess the financial risk the firm takes on and its solvency—the higher the leverage, the more debt financing dominates the capital structure and the greater the potential impact of an earnings downturn on the ability to meet obligations. Other ratio groups don’t directly capture this dependence on debt. Activity ratios look at how efficiently assets are used to generate sales, not how financing is structured. Liquidity ratios focus on the firm’s ability to meet short-term obligations, not long-term financing mix. Profitability ratios evaluate margins and returns, which reflect performance rather than financing choices.

Measuring a firm's reliance on borrowed funds is about leverage. Leverage ratios quantify how much of the firm’s financing comes from debt versus equity or total assets, showing how heavily the company leans on borrowed money. By examining metrics like debt-to-equity and debt-to-assets, you can assess the financial risk the firm takes on and its solvency—the higher the leverage, the more debt financing dominates the capital structure and the greater the potential impact of an earnings downturn on the ability to meet obligations.

Other ratio groups don’t directly capture this dependence on debt. Activity ratios look at how efficiently assets are used to generate sales, not how financing is structured. Liquidity ratios focus on the firm’s ability to meet short-term obligations, not long-term financing mix. Profitability ratios evaluate margins and returns, which reflect performance rather than financing choices.