Question

Which of the following ratios useful in assessing the liquidity position of a company?

Incorrect A.
Both defensive-interval ratio and return on stockholders' equity
B.
Defensive-interval ratio only
C.
Return on stockholders' equity only
D.
Neither defensive-interval ratio nor return on stockholders' equity

Answer 1

The defensive-interval ratio is the only ratio among the options provided that is useful in assessing the liquidity position of a company. It measures the company's ability to cover daily operational expenses with its liquid assets. Return on stockholders' equity is related to profitability rather than liquidity.

Step-by-step explanation:

To assess the liquidity position of a company, certain financial ratios are used. The correct answer to which ratio is useful in assessing this is B. Defensive-interval ratio only. The defensive-interval ratio (also known as the defensive interval period) measures a company's ability to operate without access to additional external financial resources. It calculates how many days a company can cover its cash expenses without the need for additional cash inflows. This ratio is computed by dividing liquid assets by daily operational expenses.

On the other hand, the return on stockholders' equity (ROE) measures a company's profitability and how efficiently it uses its equity capital. It is not a measure of liquidity but of profitability and return on investment. To calculate ROE, you divide net income by average shareholders' equity.

Therefore, for assessing liquidity, we focus on ratios that evaluate how well a company can meet its short-term obligations, like the defensive-interval ratio. Ratios dealing with profitability or return on investment, such as ROE, are not relevant to liquidity assessments.

Answer 2

The option B is a correct answer which is useful in assessing the liquidity position of a company.

Step-by-step explanation:

Defensive Interval Ratio :

The defensive interval ratio (DIR) is that ratio which measures that by how many days can company operate without fixed assets or non current assets.

It is a type of liquidity ratio which shows that company can pay its current obligations without impacting long term obligations. It is always display in days.

Return on Stockholders' equity :

The return on stockholder equity is a profitability ratio which represents how much the company is earning profit during a particular period.

Liquidity ratio:

The liquidity ratio is that ratio which shows the relationship between current assets and current liabilities. It describes that how the company can meet its short term obligations with its available current assets.

Thus, by above explanation it is clear that the option B is a correct answer which is useful in assessing the liquidity position of a company.