Assertion (A): Debt - equity ratio indicates the long-term solvency of a company.
Reasoning (R): It measures the ability of the company to pay off its long-term liabilities.
Select the correct answer from the code given below:

Correct option is A

The correct answer is (a) Both (A) and (R) are correct and (R) is the correct reason for (A).
The Debt-Equity Ratio is a key leverage ratio used to evaluate a company's financial structure. The Assertion is correct because this ratio compares total long-term debt to shareholders' funds, serving as a primary indicator of long-term solvency. The Reasoning is also correct and provides the logical basis for the assertion: a company is considered solvent in the long run if its assets and equity base are sufficient to cover its long-term liabilities without facing bankruptcy.
INFORMATION BOOSTER
· A high ratio suggests that a company is aggressively financing its growth with debt.
· The standard "ideal" debt-equity ratio is often considered to be 2:1, though it varies by industry.
· It protects creditors by showing the "cushion" provided by owners' capital.
· Solvency refers to the long-term ability to meet obligations, whereas liquidity refers to the short-term.