Florida General Contractor Practice Exam

What is implied by a company's growing bad debt ratio?

1. Improved credit policies

2. Increased risk of financial loss

3. Higher revenue growth

4. Stable financial health

The correct answer is: Increased risk of financial loss

A growing bad debt ratio suggests that a company is facing an increasing amount of credit that it is failing to collect from its customers. This indicates that a larger proportion of the company's receivables are becoming uncollectible, signaling potential issues within its credit management practices. This trend implies that the company is exposed to a higher risk of financial loss as uncollected debts represent a direct hit to its cash flow and overall profitability. If customers are unable or unwilling to pay their debts, the company may see its liquidity diminish and could face challenges in meeting its own financial obligations. Therefore, a rising bad debt ratio is a red flag for investors and management, indicating that the company's financial health may be deteriorating. In contrast, the other options do not align with the implications of a growing bad debt ratio. Improved credit policies would typically lead to a lower bad debt ratio, not an increase. Higher revenue growth might be misleading if it is accompanied by equally high bad debt, as it does not reflect the company's ability to collect on sales. Lastly, stable financial health is unlikely to be associated with a growing bad debt ratio, which typically points to underlying financial instability.