Which of the following ratios are used to measure a firm’s liquidity and solvency?

Solution

Cash ratio provides information about liquidity and total debt ratio determines the solvency of a business. The cash ratio is a liquidity metric that indicates a company’s capacity to pay off short-term debt obligations and current liabilities with its cash and cash equivalents. Cash Ratio = Cash and cash equivalents/current liabilities Total Debt ratio is also known as the Debt to Asset ratio. Is a leverage ratio that indicates the percentage of assets that are being financed with debt. The higher the ratio, the greater the degree of leverage and financial risk. Total debt Ratio = total debt/total assets