If a company has a high debt-to-equity ratio, what financial metric could indicate potential risk to equity holders?

A high debt-to-equity ratio suggests that a company is more leveraged, meaning it relies significantly on borrowed funds to finance its operations and growth. This increased leverage can introduce various risks, particularly for equity holders.

Net income volatility is a critical financial metric for equity holders because it reflects the company's ability to generate consistent profits despite its high debt levels. When a company has substantial debt, its fixed interest obligations mean that any fluctuations in revenue can lead to drastic changes in net income. If the company underperforms—whether due to market conditions, operational inefficiencies, or other factors—its ability to cover interest payments may be jeopardized, which could erode shareholder value or lead to potential losses.

In summary, net income volatility serves as a warning sign of how debt may amplify the impact of performance variability, hence signaling potential risk to equity holders in a highly leveraged company. Understanding this volatility enables equity analysts to assess the sustainability of profits and the overall financial health of the firm.