To assess the long term solvency of the business, which of the following ratios are needed?

(A) Interest coverage ratio

(B) Proprietary ratio

(C) Acid test ratio

(D) Debt to capital employed ratio

Choose the correct answer from the options given below:

Long-term solvency refers to a business's ability to meet its long-term financial obligations and sustain operations over an extended period. Let's examine each ratio:

(A) Interest Coverage Ratio = $\frac{EBIT}{Interest\ Expense}$

This measures the ability to pay interest on outstanding debt, which is crucial for assessing long-term debt servicing capacity. This is a long-term solvency ratio.

(B) Proprietary Ratio = $\frac{Proprietor's\ Funds}{Total\ Assets}$

This indicates what proportion of total assets is financed by owners' funds versus borrowed funds. A higher ratio means lower dependence on external debt. This is a long-term solvency ratio.

(C) Acid Test Ratio = $\frac{Current\ Assets - Inventory}{Current\ Liabilities}$

This measures the ability to pay current liabilities with quick assets. This is a liquidity ratio that assesses short-term solvency, not long-term solvency.

(D) Debt to Capital Employed Ratio = $\frac{Debt}{Capital\ Employed}$

This shows the proportion of debt in the overall capital structure. It directly indicates the extent of financial leverage and risk. This is a long-term solvency ratio.

Long-term solvency ratios focus on the debt structure and ability to meet long-term obligations. Acid test ratio, being a liquidity ratio, deals with immediate payment capacity and is excluded from long-term solvency assessment.

Correct Answer: Option 1 - (A), (B) and (D) only