Which of the following ratios is used to evaluate a company's solvency?

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Question: Which of the following ratios is used to evaluate a company\'s solvency?

Options:

Correct Answer: Debt to Equity Ratio

Solution:

The Debt to Equity Ratio is used to evaluate a company\'s solvency by comparing its total liabilities to its shareholder equity.

Which of the following ratios is used to evaluate a company's solvency?

Which of the following ratios is used to evaluate a company's solvency?

Step 1: Understand what solvency means. Solvency is a company's ability to meet its long-term debts and financial obligations.
Step 2: Learn about the Debt to Equity Ratio. This ratio compares a company's total liabilities (what it owes) to its shareholder equity (what the owners have invested).
Step 3: Know the formula for the Debt to Equity Ratio: Debt to Equity Ratio = Total Liabilities / Shareholder Equity.
Step 4: Realize that a higher Debt to Equity Ratio indicates more debt relative to equity, which may suggest lower solvency.
Step 5: Conclude that the Debt to Equity Ratio is a key measure used to evaluate a company's solvency.

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