Accountancy Part BAccounting Ratios

Which of the following ratios is considered as the solvency ratio?

Answer & explanation

Correct answer: option 3

The correct answer is Option (3) → Debt-equity ratio

Solvency ratios test whether the business can meet its long-term obligations. The debt-equity ratio compares long-term debt with shareholders’ funds, so it is a solvency ratio. Stock (inventory) turnover and debtor (trade receivables) turnover are activity ratios, and the current ratio is a liquidity ratio for short-term payments.

NCERT (2026-27 edition):
Solvency Ratios – “… 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.”