Homework Answers
A company's gearing ratio could be used to assess its Long term solvency and stability.
Correct option is (b)
Gearing ratio is generally calculated by dividing total debts by equity.
Gearing ratio should not be too high or too low.
A high gearing ratio may impose a high risk situation as more borrowed funds imply more burden of interest payments and regular repayments of principal amount. It represents the amount of equity available to back liabilities of the company.
Thus, gearing ratio is a measure of long term solvency.
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