Question

Which type of financial ratio tells you how well a company can cover its long-term liabilities? a) profitability b) profitability and efficiency c) efficiency d) solvency e) liquidity

Answer 1

Answer:

Option d: Solvency

Explanation:

Profitability ratios show the ratios related to incomes, expenses, and profits earned.

Efficiency ratios show the company's ability to use and manage its assets. For example, Inventory turnover ratio, etc.

Solvency ratios are the ratios that show the company's ability to meet with its long-term liabilities such as debt-equity ratio, total assets to debt ratio, etc.

Liquidity ratios are the ratios that show the company's ability to meet with its short-term liabilities using current assets such as current ratio, quick ratio, etc.

Hence,

Option 'd' is correct and rest all are incorrect.

In case of any doubt, please feel free to comment.