When a company was more of loans than equity to finance its business, the company...
When a company was more of loans than equity to finance its business, the company is said to be
- A) Bankrupt
- B) Solvent
- C) High geared
- D) In a strong liquid position
Correct Answer: C) High geared
Explanation
When a company relies more on loans than equity to finance its business, it is said to be high geared. This means that the company has a high level of debt compared to its equity. In other words, the company has borrowed a significant amount of money to fund its operations.Being high geared can have both advantages and disadvantages. On the one hand, borrowing money can provide the company with the funds it needs to grow and expand its business. However, it also means that the company has a higher level of financial risk. If the company is unable to generate enough profits to repay its loans, it may face difficulties in meeting its financial obligations.
In this question, the correct answer is option C: High geared. This is because when a company relies more on loans than equity, it is considered to be high geared. Option A (Bankrupt), option B (Solvent), and option D (In a strong liquid position) are not correct in this context.
Understanding the concept of gearing is important in commerce because it helps us analyze a company's financial structure and assess its risk profile. By understanding how a company finances its operations, we can make informed decisions about investing in or lending to that company.
To learn more about gearing and its implications for a company, please read the relevant sections of your commerce textbooks.