Question

Celia’s boss asked her to determine if their company is operating with too many borrowed funds. Which ratio will Celiautilize to help her with her decision?
a. Profitability.
b. Inventory turnover.
c. Liquidity.
d. Leverage

Answer 1

Answer: leverage ratio

                                                 

Explanation: In simple words, leverage ratio refers to the those financial ratios that evaluates hope much of total capital of the firm comes in the firm of debt from outside and  how capable a company is to meet its financial obligation both long term and short term.

Leverage ratios are very important from investors perspective as they depict the position of capital structure of a firm. If a leverage ratio is too high it means the company has too much debt , thus, high fixed obligation which is dangerous.

However, lower leverage ratios means company is using too much equity which means high cost of capital. Generally, gargle ratios are compared with industry averages.