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) The ratio is calculated as total liabilities divided by 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 is, 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 more debt relative to equity, which generally means higher financial risk and less ability to withstand poor business conditions.

All of the Following Statements Regarding the Ratio of Liabilities