Which ratio is described as measuring leverage and capitalization?

• A. Liabilities to Net Worth
• B. Net Sales to Working Capital
• C. Operating Expense to Sales
• D. Current Ratio

Answer: (A)

Leverage and capitalization describe how a business is financed and how much of that financing comes from debt versus owners’ equity. The ratio of total liabilities to net worth shows exactly that balance by comparing what the company owes to what the owners have invested. A higher liabilities-to-net-worth ratio means more debt per dollar of equity, signaling higher financial leverage and a heavier debt load in the company’s capitalization. This ratio helps gauge financial risk and how the firm would withstand adverse conditions, since more debt means fixed obligations regardless of performance.

Other common ratios measure different things. Net sales to working capital focuses on turnover of working capital and operating efficiency, not financing structure. Operating expense to sales relates to cost management and profitability, not how the business is funded. The current ratio looks at short-term liquidity, not long-term leverage or capitalization.