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The gearing for this business in 2020 indicates that it is A - HSC - SSCE Business Studies - Question 20 - 2020 - Paper 1
Question 20
The gearing for this business in 2020 indicates that it is A. better than the industry average and has improved since 2019. B. better than the industry average and h... show full transcript
Worked Solution & Example Answer:The gearing for this business in 2020 indicates that it is A - HSC - SSCE Business Studies - Question 20 - 2020 - Paper 1
Step 1
Determine the Gearing Ratio
Answer
To assess the gearing for the business in 2020, we first need to calculate the gearing ratio. The gearing ratio shows the proportion of debt used in the company's capital structure. A higher gearing ratio indicates more debt relative to equity, which can suggest higher risk.
Typically, a gearing ratio above 50% is considered high, indicating that the company relies more on debt than equity.
Step 2
Compare with Industry Average
Answer
Next, compare the calculated gearing ratio to the industry average. If the company's gearing is lower than the industry average, it is better positioned in terms of risk. Conversely, a higher gearing ratio than the industry average implies a worse position.
Step 3
Analyze Improvement or Worsening Since 2019
Answer
Finally, assess whether the gearing has improved or worsened since 2019. This can be determined by comparing the 2019 gearing ratio with the 2020 ratio. If the ratio has decreased, it indicates improvement, whereas an increase shows worsening performance.
Step 4