Which of the following statements best describes a company with a low current ratio and a high debt-to-equity ratio?

• A. Lower risk of bankruptcy.
• B. Higher financial leverage with more debt relative to equity.
• C. Higher liquidity.
• D. More cash on hand.

Answer: (B)

A low current ratio shows the company may have trouble covering short-term obligations with its available assets, signaling weaker liquidity. A high debt-to-equity ratio indicates heavy use of debt relative to equity, meaning greater financial leverage and more risk if earnings decline. Taken together, this describes a company with more debt relative to equity and less cushion to meet near-term obligations. That’s why the statement about higher financial leverage with more debt relative to equity fits best. The other ideas don’t align: strong bankruptcy risk or higher liquidity would conflict with the low current ratio, and having more cash on hand would typically improve liquidity rather than correspond to a low current ratio and high leverage.