Ratio of Equity To Capital Employed - SS2 Accounting Past Questions and Answers - page 1
What does the ratio of equity to capital employed measure?
The total funds invested in the business
The proportion of equity in relation to total assets
The funds needed to support day-to-day operations
The ratio of debt to equity
What does a higher ratio of equity to capital employed suggest about a company?
The company has a lower level of financial risk
The company is experiencing financial distress
The company has more of its capital financed by debt
The company is less profitable
Why is the ratio of equity to capital employed important for investors and analysts?
To assess a company's financial health
To evaluate a company's marketing strategy
To understand a company's customer base
To measure a company's employee productivity
What is equity financing?
The value of a company's assets minus its liabilities
Borrowing money from banks or other financial institutions
Raising funds by selling shares of ownership in a company
The total funds invested in the business
What is the significance of a higher ratio of equity to capital employed for a company?
A higher ratio of equity to capital employed indicates a lower level of financial risk and greater financial stability, but a company must balance the benefits of equity financing against the cost of giving up partial ownership and control of the company.
How can the ratio of equity to capital employed help investors and analysts in their decision-making process?
The ratio helps investors and analysts assess a company's financial structure, evaluate its ability to meet financial obligations and understand its risk profile. A higher ratio of equity to capital employed is generally considered favourable, indicating a more stable financial position.