Accountancy Part BAccounting Ratios

Debt-equity ratio is a sub-part of:

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → long-term solvency ratio

The debt-equity ratio compares long-term debt with shareholders' funds. It tells a long-term lender how far the business is financed by outsiders and how safe the loan is, so it is one of the solvency ratios, which judge the firm's ability to service its debt in the long run.

Option (1) short-term solvency ratio — Incorrect. Short-term solvency is measured by the liquidity ratios (current ratio and liquid ratio), which use current assets and current liabilities, not long-term debt.

Option (3) debtors turnover ratio — Incorrect. That is an activity ratio showing how quickly customers pay.

Option (4) inventory turnover ratio — Incorrect. That is an activity ratio showing how quickly stock is sold.

NCERT (2026-27 edition):
Solvency Ratios – “The persons who have advanced money to the business on long-term basis are interested in safety of their periodic payment of interest as well as the repayment of principal amount at the end of the loan period. 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.”