PSI Virginia Real Estate Practice Exam

How do debt ratios function in assessing a business?

1. They evaluate customer satisfaction

2. They determine the business's market share

3. They analyze the level of borrowing for operations

4. They measure employee productivity

The correct answer is: They analyze the level of borrowing for operations

Debt ratios are crucial in evaluating a business's financial leverage and overall financial health. Specifically, they analyze the level of borrowing utilized to finance the company's operations. A higher debt ratio indicates that a larger proportion of the business's assets are financed through debt, which can suggest increased financial risk. Conversely, a lower debt ratio may imply that the company relies more on equity financing and less on borrowing, which can signify a more stable financial position. By examining these ratios, stakeholders, including investors and creditors, can determine how well the business manages its debts in relation to its overall assets or equity. This assessment helps in making informed decisions regarding investment opportunities and creditworthiness. In contrast to the other options, measuring customer satisfaction, determining market share, and assessing employee productivity do not relate to a company’s debt levels or how financial obligations are managed within its operational framework. These aspects focus on different areas of business performance and do not provide insights into the business's financial structure or borrowing effectiveness.