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Financial Statement Analysis
Quick questions on Gearing and investor ratios explained: H2 Principles of Accounting
5short Q&A pairs drawn directly from our worked dot-point answer. For full context and worked exam questions, read the parent dot-point page.
What is gearing ratios (financial risk)?Show answer
A highly geared company (high debt proportion) carries more financial risk: interest must be paid regardless of profit, so a downturn can quickly threaten solvency. Interest cover shows the safety margin; a high cover means profit comfortably services the debt.
What is investor ratios (shareholder returns)?Show answer
EPS expresses the bottom line per share, letting shareholders compare returns across companies and years. Dividend cover shows how sustainable the dividend is: a high cover means much profit is retained (safe but less paid out); a low cover means most profit is distributed (generous but fragile).
What is q1?Show answer
Debt is \300\,000\. Find the gearing ratio. [2 marks]
What is q2?Show answer
Operating profit is \80\,000\. Find interest cover and comment. [2 marks]
What is q3?Show answer
Explain why a highly geared company is riskier in a downturn. [3 marks]
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