CUET Preparation Today
Which of the following ratios is considered as the solvency ratio? |
Stock turnover ratio Debtor turnover ratio Debt-equity ratio Current ratio |
Debt-equity ratio |
The correct answer is Option (3) → Debt-equity ratio Solvency ratios measure a company's ability to meet its long-term obligations (debts that are due over a longer period). They indicate the company's financial structure and its capacity to remain in business over the long run. Debt-Equity Ratio: This is the most common solvency ratio. It measures the relationship between long-term debt (external funds) and shareholders' funds (owner's funds/equity). A lower ratio generally indicates a more solvent position, as the company relies less on external debt. Current Ratio: This is a Liquidity Ratio, measuring the firm's ability to meet its short-term obligations.
Stock/Inventory Turnover Ratio and Debtor/Receivable Turnover Ratio: These are Activity/Efficiency Ratios, measuring how effectively the firm is utilizing its assets.
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