Skip to content

CA Intermediate · Financial Management and Strategic Management · Financial Analysis and Planning - Ratio Analysis

Which of the following ratios is a measure of a firm's long-term solvency rather than its liquidity or profitability?

The interest coverage ratio is the long-term solvency measure. It compares EBIT with interest and shows how comfortably the firm can service debt. Quick ratio measures liquidity, inventory turnover measures activity, and return on equity measures profitability, so none of these three is a solvency ratio.

  1. AQuick ratio
  2. BInterest coverage ratioCorrect
  3. CInventory turnover ratio
  4. DReturn on equity

Explanation

Interest coverage ratio (EBIT/Interest) shows the ability of the firm to meet fixed interest obligations over the long term, so it is a solvency ratio. Quick ratio is a liquidity ratio, inventory turnover is an activity ratio and return on equity is a profitability ratio.

Did you get it right without looking?

One question tells you little. A timed set on Financial Analysis and Planning - Ratio Analysis shows your real accuracy, how long you take and where you lose marks.

Practise Financial Analysis and Planning - Ratio AnalysisFree diagnostic mock

More Financial Analysis and Planning - Ratio Analysis questions