On the basis of the following information, answer the question.
| Particulars | Amount (₹) |
| Share Capital: | |
| Equity share capital (₹10 each) | 12,00,000 |
| 12% Preference share capital | 3,00,000 |
| Reserves & Surplus | 5,00,000 |
| 10% Debentures | 12,00,000 |
| Current Liabilities | 3,00,000 |
| Fixed Assets | 28,00,000 |
| Current Assets | 7,00,000 |
| Net profit after tax as per Statement of Profit & Loss | 450000 |
| Tax | 150000 |
| Market Price of the Share | 34 |
Debt-Equity ratio is a measure of:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Solvency of business
The debt-equity ratio compares long-term debt with shareholders’ funds. It shows how safe the long-term lenders are, that is, whether the business can pay interest and repay the principal in the long run. That is solvency, and the debt-equity ratio is the first of the solvency ratios in the book.
Option (1) Profitability of business — Incorrect. Profitability is measured by ratios such as gross profit ratio, net profit ratio and return on investment.
Option (2) Liquidity position of business — Incorrect. Liquidity (short-term solvency) is measured by the current ratio and the liquid ratio.
Option (3) Efficiency in use of business resources — Incorrect. Efficiency is measured by activity (turnover) ratios.
Option (4) Solvency of business — Correct. It is a long-term solvency ratio.
NCERT (2026-27 edition):
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