What is the term for the ratio of debt to equity?

Study for the BOMA Foundations Exam. Enhance your skills with flashcards and multiple choice questions. Each question comes with hints and explanations to help you get confident for your test!

The correct term for the ratio of debt to equity is the leverage ratio. This financial metric measures the amount of debt a company uses to finance its assets relative to the equity available to its shareholders. A higher leverage ratio implies that a company relies more on borrowed funds, which can magnify profits but also increases financial risk.

Understanding the leverage ratio is crucial because it provides insight into the financial structure and stability of a business. Investors and analysts often assess this ratio to determine the risk level associated with a company’s capital structure. It helps in evaluating whether a business is over-leveraged, which could lead to potential financial difficulties in downturns.

The other options do not specifically describe the relationship between debt and equity. The debt-to-income ratio primarily focuses on personal finance, relating income to debt obligations, while the loan-to-value ratio compares a loan amount to the appraised value of an asset, typically used in lending contexts. The capitalization ratio, on the other hand, gauges the proportion of debt in relation to the total capital of a company but does not explicitly define the debt-to-equity relationship.

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