[amp_mcq option1=”Acid test ratio” option2=”Debit equity ratio” option3=”Time interest earned ratio” option4=”Return on investment ratio” correct=”option3″]
The correct answer is: C. Time interest earned ratio.
The time interest earned ratio is a measure of a company’s ability to pay its interest expenses. It is calculated by dividing a company’s earnings before interest and taxes (EBIT) by its interest expense. A higher time interest earned ratio indicates that a company is better able to pay its interest expenses.
The acid test ratio is a measure of a company’s liquidity. It is calculated by dividing a company’s current assets by its current liabilities. A higher acid test ratio indicates that a company has more liquid assets to meet its short-term obligations.
The debt equity ratio is a measure of a company’s financial leverage. It is calculated by dividing a company’s total debt by its total equity. A higher debt equity ratio indicates that a company has more debt financing and less equity financing.
The return on investment ratio is a measure of a company’s profitability. It is calculated by dividing a company’s net income by its total assets. A higher return on investment ratio indicates that a company is more profitable.
In conclusion, the time interest earned ratio is the best indicator of a firm’s long-term solvency because it measures a company’s ability to pay its interest expenses.