Chartered Financial Analyst (CFA) Level 1 Practice Exam

What is typically measured by solvency ratios?

1. Operating efficiency

2. The ability to meet long-term obligations

3. Revenue growth

4. Shareholder returns

The correct answer is: The ability to meet long-term obligations

Solvency ratios are financial metrics used to assess a company's ability to meet its long-term financial obligations. These ratios focus specifically on the relationship between a company's total assets and its total liabilities, providing insights into whether a company has enough assets to cover its debts when they come due. By evaluating solvency ratios, investors and analysts can determine the financial health and sustainability of a business. A higher solvency ratio indicates that a company appears more capable of meeting long-term obligations, thus signaling a lower risk of default. This is particularly important for lenders and investors who need to ensure that the company can continue to operate effectively over the long term. The other choices do not align with the focus of solvency ratios. Operating efficiency relates to how well a company utilizes its assets and resources, revenue growth measures the increase in sales over time, and shareholder returns focus on the financial gains provided to shareholders through dividends and stock appreciation. None of these aspects specifically address the company's capability to satisfy its long-term liabilities, which is the core concern of solvency ratios.