What should Greg do about his concerns?

Greg is doing some research on a potential supplier and is concerned that the supplier’s funding is based on long-term debts and loans. Working with this supplier therefore might bring additional risks to Greg’s business.

What should Greg do about his concerns?
A . use the Return on Investment Ratio
B . do an Acid Test
C . work out the supplier’s EBITDA
D . work out the supplier’s gearing ratio

View Answer

Answer: D

Explanation:

Greg needs to use a gearing ratio. Gearing is a measure of how the business is being funded and is based on the ratio of debt to equity Gearing comes up a lot in the exam. Also make sure you know what Return on Investment, Acid Test and EBITDA are.

Return on Investment (ROI): How to Calculate It and What It Means (investopedia.com)

EBITDA: Definition, Calculation Formulas, History, and Criticisms (investopedia.com)

Acid-Test Ratio: Definition, Formula, and Example (investopedia.com)