A company's future financial health might be a concern if:

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BlackTom AI · Accepted Answer

Question: A company's future financial health might be a concern if:

Option 1: 'The company has a low debt ratio compared to its peers.' A lower debt ratio typically implies less leverage and potentially lower financial risk, which is generally considered favorable for long-term health, unless it indicates underutilization of growth financing. On its own, this does not suggest a concern about future health.

Option 2: 'Its cash flow from operations is consistently positive and growing.' Positive and growing operating cash flow is a strong indicator of healthy core business performance and the ability to fund operations, dividends, and investments. This would usually be viewed positively for future health.

Option 3: 'Its profit margins have steadily increased over the past three years.' Widening profit margins imply improved profitability and pricing power or cost control, which generally supports better future prospects. This is typically a positive sign, not a warning.

Option 4: 'Its total assets turnover has slowed down over the past three years.' Total assets turnover measures how efficiently a company uses its assets to generate sales. A slowdown over multiple years suggests declining efficiency in asset utilization, which can foretell weaker revenue growth and profitability in the future, signaling potential concern about financial health if the trend persists. This option directly points to efficiency issues that could undermine future performance.

Summarizing the reasoning: Options 2 and 3 describe favorable conditions (strong cash flow and rising margins). Option 1 describes a comparatively conservative leverage position, which is not inherently alarming. Option 4 identifies diminishing efficiency in using assets to generate sales, a trend that can foreshadow worse future results and thus would be a concern for future financial health.

Introduction to Financial Accounting M6: Quiz

A company's future financial health might be a concern if:

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