Which ratio would you use to assess a company's ability to cover its long-term o
Practice Questions
Q1
Which ratio would you use to assess a company's ability to cover its long-term obligations?
Current ratio
Debt to equity ratio
Return on equity
Gross profit margin
Questions & Step-by-Step Solutions
Which ratio would you use to assess a company's ability to cover its long-term obligations?
Step 1: Understand what long-term obligations are. These are debts or financial commitments that a company needs to pay back over a longer period, usually more than one year.
Step 2: Learn about the debt to equity ratio. This ratio compares a company's total debt to its total equity.
Step 3: Know that the debt to equity ratio shows how much debt a company has for every dollar of equity. A higher ratio means more debt compared to equity.
Step 4: Realize that if a company has a high debt to equity ratio, it may struggle to cover its long-term obligations, while a lower ratio suggests better ability to manage those obligations.
Step 5: Conclude that the debt to equity ratio is the right tool to assess a company's ability to cover its long-term obligations.
