What does the debt-to-equity ratio measure?

The debt-to-equity ratio is a financial metric that evaluates a company's financial leverage by comparing its total liabilities to its shareholders' equity. This ratio provides insight into the proportion of debt a company uses to finance its assets relative to the equity provided by its shareholders. A higher ratio indicates that a company is more heavily financed by debt, which can signify greater financial risk, as it implies that the company relies more on borrowed funds for its operations and growth, potentially increasing its financial obligations and impact on profitability during downturns.

In contrast, measuring profit margins pertains to a company's efficiency in generating profits relative to its revenue, while cash flow status is related to the liquidity and ability to meet short-term obligations. Customer creditworthiness assesses the likelihood that customers will repay their debts, which is not related to a company's capital structure or financial leverage. Thus, the debt-to-equity ratio specifically addresses the aspect of financial leverage, making it an essential indicator for investors and analysts in understanding the risk profile of a business.