A company has a low gearing of 20%. This shows that the company relies on equity capital and should therefore have less difficulty coping during tough economic times. Is this statement TRUE?

A company has a low gearing of 20%. This shows that the company relies on equity capital and should therefore have less difficulty coping during tough economic times. Is this statement TRUE?
A . Yes- a low gearing ratio means the company’s finances are made up of equity rather than debt
B . Yes- a low gearing ratio shows that the business is solvent and can deal with supply chain disruptions easily
C . No- a low gearing suggests that the company is financed by long-term debt rather than equity
D . No- a low gearing shows you that a company isn’t likely to be profitable

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Answer: A

Explanation:

the correct answer is ‘Yes- a low gearing ratio means the company’s finances are made up of equity rather than debt’.

Remember low gearing = good (based on equity), high gearing = bad (based on debt). Anything over 50% is considered high.

The two no answers are therefore incorrect and you can discount these straight away. The other yes answer is one of those answers which COULD be true, but isn’t always true, and we’d need more information to know for sure. When you get options like this there will be one that is always right and one which is sometimes right – so always pick the always right one.

Dealing with supply chain disruptions is complex, and depending what the disruption is, how big it is, what the industry is etc determines whether a supplier can handle it or not. Because there’s more factors to consider than just gearing, this isn’t the right answer.