Which ratio expresses leverage by comparing total liabilities to net worth?

• A. Current ratio
• B. Gross margin
• C. Net profit margin
• D. Total liabilities / net worth

Answer: (D)

Leverage is about how a company funds its assets with debt versus owner capital. A ratio that compares what a company owes (total liabilities) to what the owners have invested (net worth or equity) shows exactly how much of the financing comes from debt relative to equity. When you divide total liabilities by net worth, you get the debt-to-equity view of the business. A higher value means greater leverage and more financial risk, while a lower value indicates heavier reliance on equity and generally more financial stability.

Other common ratios mentioned measure different things: liquidity (how easily the company can meet short-term obligations) and profitability (how effectively it converts sales into profit). They don’t directly gauge how heavily debt finances the business, which is why they’re not expressing leverage.