A portfolio analyst is modeling the potential impact of a safety incident with multiple fatalities on its mining sector holdings. Which of the following ratios is most likely to be affected as a result?

Question

BlackTom AI · Accepted Answer

The question asks which financial ratio is most likely to be affected by a safety incident with multiple fatalities impacting mining sector holdings.
Option 1: Liabilities-to-assets ratio. This ratio measures the proportion of a company's assets financed by liabilities. If a catastrophic incident reduces asset values (e.g., through asset impairment, write-downs, or loss of productive capacity) while short-term liabilities remain the same, the assets-side denominator shrinks while liabilities stay unchanged, increasing the ratio. Additionally, if the incident leads to capital raisings or debt that alters liabilities, the ratio could be further affected. Conceptually, a large negative event that reduces asset base tends to move this ratio upward, making it the most likely to be affected among the options.
Option 2: Days of receivables. This metric tracks how long it takes to collect outstanding customer payments. A safety incident in the mining sector could affect operations and revenues, but days of receivables is more sensitive to credit terms and collection effectiveness with customers. Unless the incident directly changes collections behavior or credit policy in a short time, this ratio is less directly impacted than asset-liability structure.
Option 3: Asset turnover. Asset turnover equals sales divided by total assets, indicating how efficiently assets generate revenue. A significant adverse event could reduce sales (lower numerator) and/or reduce asset base (lower denominator). The net effect on asset turnover is uncertain and depends on the relative magnitude of changes in sales and assets. While it could be affected, the link is less direct and typically other effects dominate, such as impairment charges or revenue declines, making this a less immediate candidate than the liabilities-to-assets ratio.
Overall, the most direct and commonly observed impact of a major negative event that destroys or devalues assets is an increase in the liabilities-to-assets ratio, reflecting a weaker asset base relative to obligations. The other ratios are more dependent on changes in receivables management or the efficiency of asset use, which are not as directly tied to a catastrophic incident affecting asset values and financing structure.

FINA3401.13791.202610 FINAL EXAM - Requires LockDown Browser

A portfolio analyst is modeling the potential impact of a safety incident with multiple fatalities on its mining sector holdings. Which of the following ratios is most likely to be affected as a result?

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