Leaving Certificate Business Practice Test

The term that describes the ratio of a company's total debt to its equity capital is known as the Gearing Ratio. This ratio is an important financial metric that helps to assess the financial leverage of a company. It indicates the proportion of a company's financing that comes from debt relative to equity, providing insights into the risk level associated with the company's capital structure.

A higher gearing ratio suggests that a company is primarily financed through debt, which can increase the risk for shareholders; however, it may also indicate potential for higher returns if the company can use that debt effectively for growth. Conversely, a lower gearing ratio suggests that the company has a more stable capital structure with less reliance on debt, typically seen as less risky.

A Debt Ratio measures the total liabilities in relation to total assets and thus reflects the proportion of assets financed by debt, but it is not limited to equity capital, so it's a different concept. The Liquidity Ratio focuses on the company’s ability to meet short-term obligations, which is also distinct from assessing overall financial leverage. The Profitability Ratio relates to the company’s ability to generate profit relative to its revenue, assets, or equity, and does not consider the balance between debt and equity capital. Hence, the Gearing Ratio is the most accurate