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(Solved) - Which Ratio protects the Creditors? Lower Debt-Equity Ratio... (1 Answer) | Transtutors? ›
Return on Investment Ratio Answer:A) Lower Debt Equity Ratio Explanation: Lower the Debt Equity ratio higher is the protection to creditors. Creditors usually like a low debt to equity ratio because a low ratio (less than 1) is the indication of greater protection to their money.
Which ratio protects the creditors: 1 1 lower debt equity ratio 2 liquidity assets? ›Answer: The ratio that typically protects creditors is . Lower Debt Equity Ratio.
What does a debt-to-equity ratio of less than 1 mean? ›A ratio greater than 1 implies that the majority of the assets are funded through debt. A ratio less than 1 implies that the assets are financed mainly through equity. A lower debt to equity ratio means the company primarily relies on wholly-owned funds to leverage its finances.
What lowers debt-to-equity ratio? ›One of the most effective ways to do this is to increase revenue. Then, as your company's equity increases, you can use the funds to pay off debts or purchase new assets, thereby keeping your debt-to-equity ratio stable. Effective inventory management is also important.
Why is the ideal debt-equity ratio 2:1? ›The ideal debt to equity ratio is 2:1. This means that at no given point of time should the debt be more than twice the equity because it becomes riskier to pay back and hence there is a fear of bankruptcy.
Which ratio protects the creditors: 1 point 1 lower debt equity ratio 2 liquidity assets 3 higher inventory ratio 4 return on investment ratio? ›(Lower Debt Equity Ratio) is the best choice for creditor protection and why the others aren't as su...
What is a 1 debt to equity ratio? ›A debt-to-equity ratio of 1 is considered to be equal, i.e. total liabilities = shareholder's equity. This ratio depends on the proportion of current and noncurrent assets because it is very industry-specific. It is said that companies with intensive capital will have a higher DE than service companies. 2.
Is less than 1 debt to equity ratio good? ›A good debt to equity ratio is around 1 to 1.5. However, the ideal debt to equity ratio will vary depending on the industry because some industries use more debt financing than others. Capital-intensive industries like the financial and manufacturing industries often have higher ratios that can be greater than 2.
What is the debt-equity ratio formula? ›Debt to equity ratio formula is calculated by dividing a company's total liabilities by shareholders' equity. Liabilities: Here, all the liabilities that a company owes are taken into consideration. Shareholder's equity: Shareholder's equity represents the net assets that a company owns.
What if debt to assets ratio is less than 1? ›It implies that the business is extremely leveraged. If the ratio is less than 1, the company has more assets than liabilities. The company can fund its liabilities by selling assets if need be. The lower the debt-to-asset ratio, the better it is for the company.
How do you lower debt ratio? ›
How do you lower your debt-to-income ratio?
- Increase the amount you pay monthly toward your debts. ...
- Ask creditors to reduce your interest rate, which would lead to savings that you could use to pay down debt.
- Avoid taking on more debt.
- Look for ways to increase your income.
A low figure shows the company has good financial standing. Financial experts generally consider a debt-to-equity ratio of one or lower to be superb. Because a low debt-to-equity ratio means the company has low liabilities compared to its equity , it's a common characteristic for many successful businesses.
What is the best debt-to-equity ratio? ›What is a good debt-to-equity ratio? Although it varies from industry to industry, a debt-to-equity ratio of around 2 or 2.5 is generally considered good. This ratio tells us that for every dollar invested in the company, about 66 cents come from debt, while the other 33 cents come from the company's equity.
Is a debt ratio of 1 good? ›Generally, a good debt ratio is around 1 to 1.5. However, the ideal debt ratio will vary depending on the industry, as some industries use more debt financing than others. Capital-intensive industries like the financial and manufacturing industries often have higher ratios that can be greater than 2.
Is debt ratio always 1? ›A debt ratio of greater than 1.0 or 100% means a company has more debt than assets while a debt ratio of less than 100% indicates that a company has more assets than debt. Some sources consider the debt ratio to be total liabilities divided by total assets.
Which ratio protects creditors? ›Lower the Debt Equity ratio higher is the protection to creditors. Creditors usually like a low debt to equity ratio because a low ratio (less than 1) is the indication of greater protection to their money.
Which ratio is for creditors? ›The accounts payable turnover ratio, also known as the payables turnover or the creditor's turnover ratio, is a liquidity ratio that measures the average number of times a company pays its creditors over an accounting period.
What ratios do creditors use? ›Debt-to-credit and debt-to-income ratios can help lenders assess your creditworthiness. Your debt-to-credit ratio may impact your credit scores, while debt-to-income ratios do not. Lenders and creditors prefer to see a lower debt-to-credit ratio when you're applying for credit.