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 concept of solvency
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Answer
Solvency refers to a company's ability to meet its long-term financial obligations. It reflects whether the total assets exceed the total liabilities, indicating financial health.
Step 2
Evaluate each option
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Answer
Current ratio: This measures short-term liquidity and the ability to pay current liabilities with current assets.
Expense ratio: This reflects operational efficiency but does not directly answer solvency.
Net profit ratio: This indicates profitability rather than solvency.
Debt to equity ratio: This specifically measures the company's leverage; it indicates the relationship between the debt and equity financing. A higher ratio may signal potential solvency issues.
Step 3
Select the correct answer
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Answer
The correct answer is (D) Debt to equity ratio, as it best indicates the solvency of a business by assessing its leverage and ability to cover long-term debts.
