cash and liquidity
What does “liquidity” mean in finance?
The ability to quickly convert assets to cash without losing value.
What does “leverage” mean in finance?
Using borrowed money to increase potential returns.
What is the formula for the Debt Ratio?
Total Liabilities ÷ Total Assets.
A company borrows money to buy equipment — what type of leverage is this?
Financial leverage
What is the formula for the Debt-to-Equity Ratio?
Total Liabilities ÷ Shareholders’ Equity.
Name one example of a liquid asset.
Cash, checking account, or marketable securities.
What is the main risk of using leverage?
Higher debt increases the risk of default or financial distress.
A company has $500,000 in liabilities and $1,000,000 in assets. What is its debt ratio?
0.5 or 50%.
If a company uses cash instead of debt to buy an asset, what happens to leverage?
Leverage decreases.
A company has $300,000 in debt and $600,000 in equity. What’s the ratio?
0.5 or 50%
Why is having too much cash sometimes a bad thing for a business?
It may mean the business isn’t investing or growing efficiently.
True or False: Leverage always increases profits.
False — it can also magnify losses.
What does a high debt ratio indicate?
The company relies heavily on debt financing.
Why might a startup have a higher debt ratio than a mature company?
It relies more on loans to grow early on.
What does a high D/E ratio mean?
The company is highly leveraged (more debt financing).
What financial statement shows a company’s cash position?
The balance sheet (and the cash flow statement).
What type of leverage involves using fixed financial costs like interest?
Financial leverage.
What does a low debt ratio indicate?
The company is more financially stable and less risky.
A company’s D/E ratio goes from 0.5 to 1.5 — what might this suggest?
It’s taking on more debt relative to equity.
Why might investors prefer a moderate D/E ratio?
It shows balance between debt and equity financing.
True or False: Cash flow is the same as profit.
False — profit is earnings; cash flow is movement of money.
What’s one advantage of leverage for companies?
It allows expansion or investment without giving up ownership.
If a company’s debt ratio is above 1, what does that mean?
It owes more than it owns — liabilities exceed assets.
How can strong cash flow offset high leverage risk?
It ensures the company can meet debt payments even with high leverage.
What happens to D/E if equity decreases but debt stays the same?
The ratio increases — the company looks riskier.