Question: Various vital signs have been examined—numbers, ratios, and the like that help
decision makers evaluate an entity’s financial condition and future prospects. In connection with liabilities, do
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any specific vital signs exist that are frequently relied on to help assess the economic health of a business or other
Answer: One vital sign that is often studied by decision makers is the debt-to-equity ratio. This figure is simply
the total liabilities reported by a company divided by total stockholders’ equity. The resulting number indicates
whether the company gets most of its assets from borrowing and other debt or from its operations and owners.
A high debt-to-equity ratio indicates that a company is highly leveraged. “In a Set of
Financial Statements, What Information Is Conveyed about Noncurrent Liabilities Such as Bonds?”, that raises
the level of risk but also increases the possible profits earned by stockholders. Relying on debt financing makes
a company more vulnerable to bankruptcy and other financial problems but also provides owners with the chance
for higher financial rewards.