Q7Managerial Economics & Financial Accounting
Question
4 marks
Explain following ratios: (Formula is must) (2+2=4) a) Liquidity Ratio b) Solvency Ratio
Answer
Liquidity ratios measure short-term debt paying ability, while solvency ratios measure long-term financial stability.
a) Liquidity Ratio: Measures the firm's ability to meet its short-term obligations using its short-term assets. Formula: Current Ratio = Current Assets / Current Liabilities b) Solvency Ratio: Measures the firm's ability to meet its long-term debts and assesses the long-term financial stability. Formula: Debt-to-Equity Ratio = Total Debt / Total Equity