Evaluating performance

High debt ratio: the firm is heavily reliant on borrowed funds. This results in a potentially higher return on investment; this is because, instead of the owner contributing more of their own cash to purchase profit-generating assets, the business borrows money (taking on high debt).

However, it also increases the risk of the business and negatively impacts liquidity.

Low debt ratio: the firm is reliant on capital contributions. There is a positive effect on liquidity and lower risk.

Strategies to improve profitability: