Gearing, insolvency and bankruptcy (HL only)
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Question
Gearing ratio formula?
Answer
(Non-current liabilities ÷ Capital employed) × 100. CE = NCL + total equity.
💡 Hint
NCL ÷ CE × 100
Question
High gearing: high risk but potential for ___. Low gearing: safe but may limit ___
Answer
Higher returns (leverage); growth opportunities.
💡 Hint
Returns vs growth
Question
Six factors affecting gearing decisions?
Answer
Interest rates, business risk, growth stage, asset base, industry norms, owner preference.
💡 Hint
Rates, risk, growth, assets, industry, owner
Question
Three risks of high gearing?
Answer
Higher interest payments reducing profit, vulnerable to rate rises, less flexibility, insolvency risk if profits fall.
💡 Hint
Interest + rates + insolvency
Question
Link gearing to ___ and ___ analysis
Answer
Sources of finance (debt vs equity); liquidity analysis.
💡 Hint
Finance + liquidity
Question
High gearing = above ___%. Low gearing = below ___%
Answer
50% (high debt reliance, high risk); 25% (mostly equity, low risk). 25-50% = moderate.
💡 Hint
50% high, 25% low
Question
Two benefits of high gearing?
Answer
Interest is tax-deductible (cheaper than dividends); owners keep full control (no dilution).
💡 Hint
Tax-deductible + control
Question
Stable businesses (utilities) can handle ___ gearing than volatile ones (startups)
Answer
Higher — predictable income can reliably cover interest payments.
💡 Hint
Higher
Question
Gearing measures how reliant the business is on ___
Answer
Debt to finance its operations — proportion of capital from long-term borrowing.
💡 Hint
Debt reliance
Question
No single 'correct' gearing level — what matters is ___
Answer
Whether the business can comfortably meet interest payments from operating profit.
💡 Hint
Can it pay interest?
Question
Three benefits of low gearing?
Answer
Lower financial risk, more attractive to cautious investors, greater flexibility to borrow later.
💡 Hint
Low risk + attractive + flexible
Question
NCL $300k, equity $700k. Gearing?
Answer
CE = $1m. Gearing = ($300k ÷ $1m) × 100 = 30% — moderately geared.
💡 Hint
30%
Question
NCL $600k, equity $400k. Gearing?
Answer
CE = $1m. Gearing = ($600k ÷ $1m) × 100 = 60% — highly geared, higher risk.
💡 Hint
60%
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Efficiency ratios (HL only)
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