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The debt ratio of Company A is 0.31 and the debt ratio of Company B is 0.21. Based on this information, an investor can conclude:

Multiple Choice

Company B has more debt than Company A.

a) Company B has less financial leverage.

b) Company A has less financial leverage.

c) Company A has 10% more assets than Company B.

d) Both companies have too much debt.

1 Answer

6 votes

Final answer:

Based on the debt ratios provided, Company B has less financial leverage compared to Company A, as it has a lower debt ratio, indicating a smaller proportion of its assets is financed by debt.

Therefore, the correct answer is: option b) Company A has less financial leverage.

Step-by-step explanation:

The debt ratio is calculated as total liabilities divided by total assets, representing the proportion of a company's assets that are financed by debt.

A lower debt ratio suggests that the company has less leverage and is using less debt financing in comparison to its assets.

Company A has a debt ratio of 0.31, and Company B has a debt ratio of 0.21. Given this information, we can conclude that Company B has less financial leverage than Company A.

It indicates that Company B is relying less on borrowed funds in proportion to its assets compared to Company A.

Therefore, choice (b) is correct: 'Company B has less financial leverage.' The other options provided in the question do not directly relate to the information given about the debt ratios.

User Shujath
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