ACCA Financial Management (F9) Certification Practice Exam

Disable ads (and more) with a membership for a one time $4.99 payment

Prepare for the ACCA Financial Management (F9) Certification Exam with engaging quizzes and interactive content. Dive deep into financial management concepts and boost your exam confidence with questions that come with detailed explanations.

Practice this question and more.

What does gearing refer to in a financial context?

Proportion of debt in a company's capital structure
Measure of risk associated with equity financing
Analysis of firm profitability
Assessment of liquidity ratios

The correct answer is: Proportion of debt in a company's capital structure

Gearing refers to the proportion of debt in a company's capital structure, highlighting the relationship between the company's borrowed funds and equity. A high level of gearing indicates that a larger portion of the company’s capital is financed through debt, which can amplify both potential returns and risks. This is important because companies with high gearing ratios might face higher financial risk, particularly in adverse economic conditions, affecting their ability to meet interest payments and repay debt. Understanding gearing is crucial for investors and financial analysts as it provides insights into the company's financial stability, risk profile, and potential for growth. By analyzing the balance between debt and equity, stakeholders can assess how leveraged the company is, and this affects both strategic decision-making and investment evaluations.