Santos needs to assess its debt situation with respect to the value of

QUESTION

Santos needs to assess its debt situation with respect to the value of the company. Which of the following, if true, most strengthens the case that Santos’s debt is manageable?

A) Santos has a high profitability ratio.
B) Santos has a high inventory turnover ratio.
C) Santos has a low inventory turnover ratio.
D) Santos has a high debt to owners’ equity ratio.
E) Santos has a low debt to owners’ equity ratio.

ANSWER

Answer: E
Explanation: E) The debt to owners’ equity ratio is low if the firm’s liabilities are low compared to the owners’ equity, which indicates that its debt is low. If the debt to owners’ equity ratio is high, on the other hand (Choice D), it indicates that Santos’s debt is high. Profitability ratio (Choice A) is a measure of how well Santos is doing business and does not pertain directly to its debt. Inventory turnover ratio (Choices B and C) does not pertain to debt.