What does the debt to equity ratio measure in a company?

The debt to equity ratio specifically measures the proportion of debt that a company uses to finance its operations relative to the equity that shareholders have invested in the business. This ratio is crucial for evaluating the financial leverage of the company; a higher ratio indicates that a company is using more debt relative to equity, which can imply higher financial risk but may also indicate an aggressive growth strategy.

In contrast, other options focus on different financial aspects. The total liabilities relative to total assets looks at the overall solvency of the company, indicating how much of the company’s assets are financed through debt, rather than comparing debt directly to equity. The company's overall liquidity position relates to its ability to meet short-term obligations through its current assets, without discussing equity. Similarly, the ratio of current liabilities to current assets focuses on liquidity as well, emphasizing short-term financial health rather than the balance between debt and equity. Thus, the choice that accurately describes the debt to equity ratio is the one that highlights the proportion of debt financing relative to shareholder equity.