When a higher than normal ratio of long-term debt to net worth is coupled with a lower than average ratio of profits to total assets,the company
A)is highly successful.
B)is comparable with industry standards.
C)has a high risk of financial failure.
D)has a liquidity problem.

Question

Quizplus · Accepted Answer

A high ratio of long-term debt to net worth indicates that the company has a significant amount of debt relative to its equity. If this is coupled with a lower than average ratio of profits to total assets, it suggests that the company is not generating sufficient earnings to cover its debt obligations. This makes the company vulnerable to financial failure if it is unable to service or repay its debt in the future. Therefore, the best choice is C, which indicates that the company has a high risk of financial failure.

When a Higher Than Normal Ratio of Long-Term Debt to Net