Chapter 3.6 - Debt/Equity ratio analysis

Question 1

Bankruptcy

Answer 1

The legal process declared by the courts that occurs when an individual or business entity is unable to repay its debts

Question 2

Credit control

Answer 2

Refers to the ability of a business to collect its debts within a suitable timeframe

Question 3

Creditor days ratio

Answer 3

An efficiency ratio that measures the average number of days it takes for a business to pay its creditors

Question 4

Debt and equity ratios (efficiency ratios)

Answer 4

Enable a business to calculate the value of their liabilities and debt against their equity. These ratios are a measure of the financial stability of the business

Question 5

Debtors days ratio

Answer 5

An efficiency ratio that measures the average number of days it takes for a business to collect the money owed from debtors

Question 6

Gearing ratio

Answer 6

Measures the percentage of an organization’s capital employed that comes from external sources (noncurrent liabilities - such as mortgages)

Question 7

Insolvency

Answer 7

A financial state where an individual or business entity is unable to pay its debts on time. If insolvency cannot be resolved, this can lead to bankruptcy.

Question 8

Liquidity

Answer 8

Refers to how easily an asset can be turned into cash. Highly liquid assets are those that can be converted into cash quickly and easily without losing their monetary value

Question 9

Profit quality

Answer 9

Refers to the ability of a business to earn profit in the foreseeable future. A business with a good profit quality can earn profit in the long run

Question 10

Stock turnover ratio / Inventory turnover ratio

Answer 10

Measures the number of times a business sells its stocks within a year. It can also be expressed as the average number of days it takes for a business to sell all of its inventory