What does a Debt-Equity Ratio greater than 1 indicate?

A Debt-Equity Ratio greater than 1 indicates that a company has more debt financing relative to its equity financing. This situation reveals that the company is using leverage, or borrowed capital, to fund its operations and growth. Leverage can amplify both potential returns and risks; thus, a firm with a debt-equity ratio greater than 1 is typically considered a leveraged firm.

In terms of capital structure, a higher ratio suggests reliance on debt financing, which can be beneficial for growth but also raises financial risk since the company has obligations to meet regardless of its operational performance. This can lead to higher interest payments and potential challenges in economic downturns.

Other options may imply different characteristics of a firm's capital structure. For example, a company that is highly conservative would typically maintain a lower debt level relative to equity. A balanced capital structure implies that the proportions of debt and equity are relatively equal, which is not indicated by a ratio greater than 1. Generating low interest returns suggests poor performance or utilization of capital but does not directly correlate with the debt-equity ratio measurement. Thus, the correct interpretation of a debt-equity ratio greater than 1 as indicative of a leveraged firm is well-founded in financial theory.