SACE Stage 2 Accounting Practice Exam 2025 - Free Accounting Practice Questions and Study Guide

Paying off debts and credit is a significant way to improve the debt to equity ratio. The debt to equity ratio represents the proportion of a company's financing that comes from debt compared to equity. By reducing the amount of debt, the ratio decreases, indicating a healthier balance sheet and potentially less financial risk. When a company effectively pays off its debts, it not only lowers the total liabilities but also, if equity remains unchanged, improves the stability and attractiveness of the business to investors and creditors.

Increasing personal expenses, lowering profitability, and reducing capital investments would not positively impact the debt to equity ratio. In fact, increasing personal expenses could lead to higher liabilities, lowered profitability would affect retained earnings and possibly increase debt reliance, and reducing capital investments might limit future growth potential, thereby not contributing to a healthier debt to equity balance. Therefore, paying off debts directly addresses the issue of debt in the ratio, leading to an improved financial position.