- CFA Exams
- CFA Level I Exam
- Topic 4. Financial Statement Analysis
- Learning Module 11. Financial Analysis Techniques
- Subject 3. Liquidity Ratios
CFA Practice Question
True or False? The lower the debt to equity ratio, the riskier the situation.
Correct Answer: False
The debt to equity ratio shows the amount of a company's assets provided by creditors in relation to the amount provided by stockholders. The higher the debt to equity ratio, the greater the risk, because the percentage of assets provided by creditors versus stockholders increases. This represents greater legal obligations to pay interest periodically and principal at maturity.
User Contributed Comments 4
| User | Comment |
|---|---|
| johntan1979 | Is this implying that non-public companies are "high risk" investments, since they are 100% debt-financed? |
| Seancfa1 | You can have equity in a privately held firm. |
| ldfrench | Take a look at Lehman Brothers and Bear Stearns D/E in 2007-2008 |
| houstcarr | non-public companies definitely are not 100% debt financed |