All of the following statements regarding the ratio of liabilities to stockholders' equity are true except
A) a ratio of 1 indicates that liabilities equal stockholders' equity
B) sole proprietorships can use this ratio but substitute total owner's equity for total stockholders' equity
C) the higher this ratio, the better able a business is to withstand poor business conditions and pay creditors
D) the lower this ratio, the better able a business is to withstand poor business conditions and pay creditors

Question

Quizplus · Accepted Answer

A higher ratio of liabilities to stockholders' equity indicates that a company is more leveraged, meaning it has more debt compared to its equity. This can make it more vulnerable in poor business conditions, not better able to withstand them.

All of the Following Statements Regarding the Ratio of Liabilities