Final answer:
The total liabilities/total assets ratio measures the proportion of a company's assets that are financed by debt or other liabilities. It provides insight into a company's financial leverage and solvency.
Step-by-step explanation:
In a balance sheet, the ratio of total liabilities to total assets is called the total liabilities/total assets ratio. This ratio measures the proportion of a company's assets that are financed by debt or other liabilities. It provides insight into a company's financial leverage and solvency.
For example, if a company has total liabilities of $100,000 and total assets of $500,000, the total liabilities/total assets ratio would be 0.2, or 20%. This means that 20% of the company's assets are financed by debt or other liabilities.
A higher total liabilities/total assets ratio indicates a greater reliance on debt financing, which can increase financial risk. Conversely, a lower ratio indicates a smaller proportion of debt financing and may suggest a stronger financial position.