Question : A company with a high debt-equity ratio indicates:
Option 1: Higher risk for investors
Option 2: Higher profitability
Option 3: Higher liquidity
Option 4: Lower interest payments
Correct Answer:
Higher risk for investors
Solution : The correct answer is (a) Higher risk for investors
A company with a high debt-equity ratio indicates a higher risk for investors. The debt-equity ratio is a financial ratio that compares a company's total debt to its shareholders' equity. It reflects the proportion of a company's financing that comes from debt compared to equity. When a company has a high debt-equity ratio, it means that it relies more on debt financing than equity financing. This can be an indicator of higher financial leverage, which can increase the company's risk profile. Higher debt levels result in increased interest payments and financial obligations, which can put a strain on the company's cash flow and financial stability.
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