Which financial ratio is most directly impacted by a company's capital structure?

The debt-to-equity ratio is the financial ratio most directly influenced by a company's capital structure. This ratio measures the relative proportion of a company’s debt financing compared to its equity financing. It is calculated by dividing total liabilities by shareholders' equity.

A company's capital structure consists of its mix of debt and equity. Changes to this structure, such as taking on new debt or issuing additional equity, will directly affect the debt-to-equity ratio. For example, if a company borrows money to finance its operations or growth (increasing debt), the debt-to-equity ratio will rise, indicating a greater reliance on debt. Conversely, if a company pays down its debt or issues more equity, the ratio will decrease.

The other financial ratios listed are affected by various operational and financial aspects of the business, but they do not have a direct correlation to the capital structure. The current ratio is primarily influenced by current liabilities relative to current assets and assesses liquidity. Gross margin focuses on sales and the cost of goods sold, reflecting profitability rather than capital structure. Inventory turnover measures how efficiently a company manages its inventory, which relates more to operational efficiency than to financing sources.