Which of the following ratios would be most useful in assessing a company’s long-term solvency?Quick RatioGross Profit MarginInventory Turnover RatioDebt-to-Equity Ratio
Question
Which of the following ratios would be most useful in assessing a company’s long-term solvency?Quick RatioGross Profit MarginInventory Turnover RatioDebt-to-Equity Ratio
Solution
The Debt-to-Equity Ratio would be the most useful in assessing a company’s long-term solvency. This ratio provides insight into the company's leverage, i.e., the extent to which the business is reliant on debt financing versus own equity to fund its operations. A high Debt-to-Equity ratio typically means that the company has been aggressive in financing its growth with debt, which can result in volatile earnings due to the additional interest expense. On the other hand, a low Debt-to-Equity ratio might imply that the company is not taking advantage of the increased profits that financial leverage may bring. Therefore, this ratio is crucial for assessing long-term solvency as it indicates the company's ability to meet its long-term debt obligations.
Similar Questions
Which of the following are not long-term solvency ratios?Return on Shareholders EquityDebt Equity ratioDebt service coverage ratioLong-term debt to assets
Which ratios indicate how efficiently the company generates sales from its assets?Quick asset ratioNet profit ratioSolvency ratioWorking capital turnover
Which of the following ratios is considered a measure of a company’s ability to pay long-term debt?Group of answer choicesprice/earnings ratiotimes-interest-earned ratioacid-test ratioearnings per share of common stock
Which of the ratios listed helps to indicate the profitability from the shareholders’ view? a. Interest coverage ratio b. Debtors turnover c. Price-earnings ratio d. Debt-to-equity
Which ratio measures a company's ability to meet its long-term debt obligations?a.Acid-test ratiob.Current ratioc.Debt-to-equity ratiod.Return on equity ratio
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.