Question

Which of the following ratios are computed for evaluating solvency of the business?

1. Proprietary Ratio
2. Interest Coverage Ratio
3. Total Asset to Debt Ratio
4. Fixed Asset Turnover Ratio

• A. (A), (B) and (D) only
• B. (A), (B) and (C) only
• C. (A), (B), (C) and (D)
• D. (B), (C) and (D) only

Answer 1

The Correct Option is B

To assess business solvency, we examine ratios reflecting a company's capacity to meet long-term obligations. The relevant ratios are:

1. Proprietary Ratio: Assesses the proportion of shareholder equity to total assets, indicating owner funding versus external liabilities.
2. Interest Coverage Ratio: Measures the company's ability to cover interest payments using earnings before interest and taxes (EBIT). A higher ratio signifies stronger financial stability.
3. Total Asset to Debt Ratio: Compares total assets to total debt, directly indicating how well assets cover liabilities.
4. Fixed Asset Turnover Ratio: Primarily assesses fixed asset utilization for sales generation, not solvency.

The key ratios for solvency evaluation are:

• Proprietary Ratio (A)
• Interest Coverage Ratio (B)
• Total Asset to Debt Ratio (C)

Therefore, the correct selection is: (A), (B), and (C) only