Financial Analysis: Gearing and Interest Cover Ratios

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What do liquidity ratios examine the relationship between?

Debt and equity financing
Cash flows from operating and investing activities
Net profit and total revenue
Liquid resources and amounts due for payment (correct)

Which category of ratios deals with the relationship between contributions from owners and lenders in financing a business?

Efficiency ratios
Investment ratios
Profitability ratios
Financial gearing ratios (correct)

What is the primary purpose of businesses according to the text?

Helping employees achieve financial stability
Creating wealth for owners (correct)
Promoting environmental sustainability
Ensuring customer satisfaction

Which category of ratios provides an indication of the success in creating wealth for business owners?

Profitability ratios (B) Signup and view all the answers

What do efficiency ratios primarily measure?

Efficiency with which resources are utilized (C) Signup and view all the answers

Which ratio category is also known as activity ratios?

Efficiency ratios (A) Signup and view all the answers

What do gearing ratios help to reveal about a business?

Extent to which loan finance is employed and the consequent effect on the level of risk (C) Signup and view all the answers

Who are likely to be concerned with the long-term viability of a business?

Long-term lenders (B) Signup and view all the answers

What type of information needs determine the ratios that different users of financial information find useful?

Different information needs (A) Signup and view all the answers

Which statement is not a part of the bases of comparison for financial ratios?

Initial overview (A) Signup and view all the answers

What should short-term lenders, such as suppliers, be interested in when assessing a business?

Ability of the business to pay short-term obligations (D) Signup and view all the answers

What financial aspect may suppliers be interested in when offering goods and services on credit to a business?

Interest cover ratio (C) Signup and view all the answers

What does the gearing ratio primarily measure in a company?

The proportion of debt financing in the company's capital structure (A) Signup and view all the answers

What is the purpose of ratio analysis in financial statements?

To aid in understanding the financial statements and identify trends (D) Signup and view all the answers

What is the interest cover ratio primarily used for?

To assess the company's ability to pay its interest expenses (B) Signup and view all the answers

What type of ratios are used to help shareholders assess their investment returns?

Investment ratios (B) Signup and view all the answers

What is a characteristic of ratio analysis?

It is an inexact science that requires cautious interpretation (B) Signup and view all the answers

What can be used as a benchmark for ratio analysis?

Planned performance, past period performance, or similar businesses' performance (A) Signup and view all the answers