At Sips and Chips, a local cybercafé, a financial manager has calculated the debt-to-equity ratio and discovered it is equal to one. What does this indicate about Sips and Chips?
A) It is relying exclusively on debt financing to meet its long-term financing needs.
B) It is relying on equal amounts of debt and equity financing.
C) It has an equal amount of current assets and current liabilities.
D) It is at risk of being unable to pay its short-term debts when they come due.

Question

Quizplus · Accepted Answer

A debt-to-equity ratio of one indicates that Sips and Chips is relying on equal amounts of debt and equity financing to meet its long-term financing needs. This can be seen as a balance between the risks and benefits of each type of financing. However, it does not provide any information about Sips and Chips' current assets and liabilities, nor does it suggest that the company is at risk of being unable to pay short-term debts.

At Sips and Chips, a Local Cybercafé, a Financial Manager