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Which of the following best indicates the solvency of a business? (A) Current ratio (B) Expense ratio (C) Net profit ratio (D) Debt to equity ratio - HSC - SSCE Business Studies - Question 4 - 2001 - Paper 1
Question 4
Which of the following best indicates the solvency of a business? (A) Current ratio (B) Expense ratio (C) Net profit ratio (D) Debt to equity ratio
Worked Solution & Example Answer:Which of the following best indicates the solvency of a business? (A) Current ratio (B) Expense ratio (C) Net profit ratio (D) Debt to equity ratio - HSC - SSCE Business Studies - Question 4 - 2001 - Paper 1
Step 1
Identify the correct ratio for solvency
Answer
To determine the solvency of a business, we need a ratio that indicates its ability to meet long-term obligations. Among the options:
- Current Ratio: Measures short-term liquidity, not long-term solvency.
- Expense Ratio: Focuses on operational efficiency, irrelevant to solvency.
- Net Profit Ratio: Reflects profitability, not solvency either.
- Debt to Equity Ratio: Compares total liabilities to shareholders' equity, indicating financial leverage and long-term solvency.
Hence, the best indicator of solvency is the Debt to Equity Ratio (Option D).