Which one of the following ratios is the indicator of the long term solvency of a firm?

Acid test ratio
Debit equity ratio
Time interest earned ratio
Return on investment ratio

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.

Exit mobile version