CIPS L4M4 Exam - Topic 3 Question 37 Discussion

Actual exam question for CIPS's L4M4 exam

Question #: 37
Topic #: 3

Greg is doing some research on a potential supplier and is concerned that the supplier's funding is based on long-term debts and loans. Working with this supplier therefore might bring additional risks to Greg's business. What should Greg do about his concerns?

Ause the Return on Investment Ratio

Bdo an Acid Test

Cwork out the supplier's EBITDA

Dwork out the supplier's gearing ratio

Show Suggested Answer

Suggested Answer: D

Greg needs to use a gearing ratio. Gearing is a measure of how the business is being funded and is based on the ratio of debt to equity Gearing comes up a lot in the exam. Also make sure you know what Return on Investment, Acid Test and EBITDA are.

Return on Investment (ROI): How to Calculate It and What It Means (investopedia.com)

EBITDA: Definition, Calculation Formulas, History, and Criticisms (investopedia.com)

Acid-Test Ratio: Definition, Formula, and Example (investopedia.com)

by Leeann at Jul 10, 2025, 01:34 AM

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Ilda

5 months ago

I thought the Acid Test was for liquidity, not debt?

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Hyun

5 months ago

A Return on Investment Ratio won't help with debt concerns.

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Junita

6 months ago

Totally agree, D is the way to go!

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Maddie

6 months ago

Wait, isn't EBITDA just a fancy term for profit?

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Wynell

6 months ago

Gearing ratio shows how much debt a company has!

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Denny

6 months ago

I feel like the gearing ratio is the best option since it shows how much debt the supplier has compared to equity, but I could be mixing it up with something else.

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Ronald

7 months ago

Working out the supplier's EBITDA could give some insight into their profitability, but I'm not confident if that directly addresses Greg's concerns about debt.

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Cherrie

7 months ago

I remember practicing questions about liquidity ratios, but I don't think the Acid Test is the right choice here.

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Timothy

7 months ago

I think Greg should look into the supplier's gearing ratio, but I'm not entirely sure how that would help assess the risk.

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Loise

7 months ago

I'm a little confused on the best approach. Should I be looking at profitability ratios like EBITDA or more liquidity-focused metrics like the acid test? I'll need to think this through carefully.

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Valentine

7 months ago

The gearing ratio is definitely the way to go here. That will give Greg a clear picture of how much the supplier is relying on debt financing, which is the key concern mentioned in the question.

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Lonna

8 months ago

Hmm, I'm a bit unsure here. The question mentions long-term debts and loans, so maybe the acid test or EBITDA would be better ways to evaluate the supplier's financial health.

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Diane

8 months ago

This seems like a straightforward question about assessing a supplier's financial risk. I'd focus on the gearing ratio to get a sense of their debt levels.

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Yesenia

9 months ago

I think Greg should consider both the Acid Test and the gearing ratio to make an informed decision.

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Loreta

10 months ago

But wouldn't working out the supplier's gearing ratio also provide valuable insight into their financial stability?

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Gertude

10 months ago

Personally, I think Greg should just go with the supplier who can give him the best discounts. Forget all this financial mumbo-jumbo, it's all about the bottom line!

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Terrilyn

10 months ago

Haha, Greg's probably wishing he had a crystal ball to see the supplier's future. But hey, at least he's not asking the Magic 8-Ball for advice, right?

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Ilene

10 months ago

I agree with Jerlene, an Acid Test would help assess the supplier's financial health.

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Dortha

10 months ago

A) Return on Investment Ratio? Really? That's like trying to put out a fire with a squirt gun. Gotta go with D) for this one.

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Cyril

9 months ago

User 1

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Charlesetta

10 months ago

B) Acid test, baby! Forget the other options, this is the real deal when it comes to gauging a supplier's liquidity.

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Miles

10 months ago

Hmm, I'd say C) EBITDA is the best choice. It'll show how much cash the supplier is generating, which is crucial for assessing their long-term viability.

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