Which financial ratios are used to assess the long-term solvency of a firm?
Show Hint
- Liquidity ratios
- Profitability ratios
- Leverage or Capital structure ratios
- Efficiency ratios
The Correct Option is C
Solution and Explanation
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.
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