Certified Management Accountant Practice Exam

A very low degree of leverage indicates that a company relies minimally on debt for financing its operations. This situation typically results in low sensitivity of earnings to changes in sales because the company has fewer fixed financial obligations that must be met regardless of its sales volume. When earnings are less sensitive to fluctuations in sales, this often leads to a more stable financial performance, as there is less risk associated with rising or falling sales figures necessitating debt payments. In contrast, high levels of leverage can increase the risk associated with earnings variability; therefore, a company with low leverage is less affected by changes in revenue, which is reflected in its stability in earnings growth. This relates directly to risk management within a company's capital structure. The other options, such as high risk of insolvency, dependency on debt financing, or high profitability margins, do not align with the implications of a low degree of leverage. In fact, a low degree of leverage tends to indicate a reduced risk of insolvency, strengthened financial stability, and independence from significant debt-related pressures.