Question

Which of the following is assessed using the debt​ ratio?

A.

net income

B.

profitability

C.

revenues

D.

risk of default

Answer 1

D. This option is correct. Because, the default risk is assessed using the loan ratio. The default risk is the possibility that a company or an individual may be unable to make the required payments on the debt obligation. Investors have a default risk in all types of credit extensions. Therefore, a higher level of risk avoids the higher need and in turn enables higher interest rates.

The default risk may change over time due to changes in the overall financial situation. The economic downturn in business is affecting the earnings of many companies. Therefore, their ability to pay interest on the loan also appears to have been affected.

A. This option is incorrect Net income is calculated to calculate the total revenue earned by the business. So this option is wrong here.

B. This option is incorrect Profit is one of the four bases for analyzing the performance of an entire company. And the other three are efficiency, loss, and market prospects, which include how well a company is doing, and how well it manages operations in the business, so investors, managers use it to analyze future prospects.

C. This option is incorrect Money earned from the hard work of any company's business is money, known as revenue, because it appears first on a company's income statement. Therefore, revenue does not seem to be evaluated using loan ratio. Net income or revenue is minus costs. If the revenue is more than the expenditure, then the company is in constant profit.