Question

Which financial ratios are used to assess the long-term solvency of a firm?

• A. Liquidity ratios
• B. Profitability ratios
• C. Leverage or Capital structure ratios
• D. Efficiency ratios

Hint:

Leverage ratios assess a firm’s long-term financial stability and ability to repay debts.

Answer 1

The Correct Option is C

Financial ratios help evaluate different aspects of a firm's performance and health.
Leverage or Capital structure ratios measure a company's ability to meet its long-term obligations by analyzing the composition of its debt and equity. These ratios include:

Debt-to-Equity Ratio
Interest Coverage Ratio
Debt Ratio
They indicate the financial risk and solvency position of the firm over the long term.
Explanation of Other Options:

(A) Liquidity ratios: Measure short-term ability to pay current liabilities.
(B) Profitability ratios: Measure earning efficiency.
(D) Efficiency ratios: Measure how well assets are utilized.
Therefore, option (C) correctly identifies the ratios assessing long-term solvency.