Certified Management Accountant Practice Exam 2025 – The Comprehensive All-in-One Guide to Exam Success!

The debt to total assets ratio is a financial metric used to assess a company's leverage and financial stability. It measures the proportion of a company's assets that are financed by debt. The calculation is conducted by dividing total liabilities by total assets.

This ratio provides investors and creditors with insight into the level of risk associated with the company's capital structure. A higher ratio indicates that a larger portion of the assets is financed through debt, which might suggest higher financial risk, while a lower ratio suggests a more conservative approach to financing.

Ultimately, the reason this particular calculation is the correct choice highlights its significance in evaluating how much of a company's assets are owned outright versus how much is owed to creditors. It reflects the reliance on debt in the overall financial structure of the company, allowing stakeholders to better assess the firm's risk profile and creditworthiness.