What does a high debt to equity ratio typically indicate?

A high debt to equity ratio typically indicates greater financial risk because it shows that a company is financing a larger portion of its operations through debt relative to equity. When a business relies heavily on borrowed funds, it may face increased vulnerability during downturns or economic stress, as it still needs to meet its debt obligations regardless of its revenue levels. This heightened risk can impact the company's ability to secure additional financing, affect its credit rating, and ultimately influence investor confidence.

In contrast, a lower debt to equity ratio is often seen as a sign of a robust financial position, suggesting that a company is less reliant on debt financing and has a greater cushion to absorb potential losses. Other options such as strong financial position, low investment risk, and higher profitability do not necessarily correlate with a high debt to equity ratio. In fact, they are often indicators of a healthy balance between debt and equity financing, where a company can efficiently leverage debt without taking on excessive risk.