Which of the following ratio is the most important in determining the long-term solvency of a company?
Answer & explanation
Correct answer: option 3
The correct answer is option 3- Debt-Equity Ratio.
Debt-Equity Ratio is the most important in determining the long-term solvency of a company.
Debt-Equity Ratio measures the relationship between long-term debt and equity. If debt component of the total long-term funds employed is small, outsiders feel more secure. From security point of view, capital structure with less debt and more equity is considered favourable as it reduces the chances of bankruptcy. Normally, it is considered to be safe if debt equity ratio is 2 : 1.
OTHER OPTIONS
- Return on investment- Profitability Ratio
- Current Ratio- Liquidity ratio
- Stock Turnover Ratio-Activity ratio