The liquidity and solvency of a company are measured by :

(A) Current ratio
(B) Profitability ratio
(C) Inventory Turnover ratio
(D) Debt Equity ratio
(E) Gross Profit ratio

Choose the correct answer from the options given below :

(A) and (D) only

The correct answer is Option (3) - (A) and (D) only

(A) Current ratio - Liquidity ratio
(B) Profitability ratio- Profitability ratio
(C) Inventory Turnover ratio- Activity ratio
(D) Debt Equity ratio- Solvency ratio
(E) Gross Profit ratio- Profitability ratio

* Liquidity ratios are calculated to measure the short-term solvency of the business, i.e. the firm’s ability to meet its current obligations. These are analysed by looking at the amounts of current assets and current liabilities in the balance sheet. The two ratios included in this category are current ratio and liquidity ratio.

*Solvency ratios are calculated to determine the ability of the business to service its debt in the long run. The following ratios are normally computed for evaluating solvency of the business. 1. Debt-Equity Ratio; 2. Debt to Capital Employed Ratio; 3. Proprietary Ratio; 4. Total Assets to Debt Ratio; 5. Interest Coverage Ratio.

*Activity ratios express the number of times assets employed, or, for that matter, any constituent of assets, is turned into sales during an accounting period. Higher turnover ratio means better utilisation of assets and signifies improved efficiency and profitability, and as such are known as efficiency ratios. The important activity ratios calculated under this category are 1. Inventory Turnover; 2. Trade receivable Turnover; 3. Trade payable Turnover; 4. Investment (Net assets) Turnover 5. Fixed assets Turnover; and 6. Working capital Turnover. 7. Current assets turnover

* Profitability Ratios: Profitability ratios delve into a company's capacity to generate earnings based on the utilization of its resources. Prominent profitability ratios include the Gross Profit ratio, Operating ratio, Net Profit Ratio, Return on Investment (ROI) or Capital Employed, Earnings per Share (EPS), Book Value per Share, Dividend per Share, and Price/Earnings (P/E) ratio.