Risk

Question 1

What is the ratio for
Debt / Equity ratio (gearing ratio)

Answer 1

Non-current liabilities:
Owners’ equity

=x:1

Question 2

What is your non current liabilities

Answer 2

Borrowed capital (loans

Question 3

What is your owners equity

Answer 3

Own capital ( partners capital

Question 4

Why’s does this ration mean

Answer 4

It’s means how dependent is the business on loans

Question 5

What three things does this ration show

Answer 5

1
1 It shows the ratio
between borrowed capital (loans and own capital (partners’ capital)

2.It shows the creditworthiness and ability to raise more finance
(will the bank give more loans to the business?)

3. It shows the degree of risk the business has placed itself in. (paying back loans with interest puts the business at great financial risk). Even if the profit decreases, the loans as well as the interest must still be repaid.
   This can put financial strain on the business.

Question 6

When will the bank consider a loan to the business

Answer 6

If the ratio is between 0,5:1 to 1:1

Question 7

Why’s is the ideal ration

Answer 7

1:1

for every
R1 own capital (shares) there is R1 borrowed funds (loans)

Question 8

What does it mean if the ration is less than 1:1

Answer 8

1

•loans are not high
•the business is a low risk/ low gearing / favourably geared
•advantage to the business
•business has a good credit rating (creditworthy)

Question 9

What does it mean if the ratio is higher that 1:1

Answer 9

•loans are high
•interest must be paid
•business is a high risk/ high gearing /
unfavourably geared
•disadvantage to business
•has a bad credit rating (not creditworthy)

Question 10

How can we improve the ratio if it’s high

Answer 10

:
A decrease of the loans (repayment of loans)

Question 11

What can we use to lay off loans

Answer 11

Use the fixed deposit

Seek stick faster to generate more cash

Sell non current assets