Answer (C) is correct . The debt to equity ratio is a measure of risk to creditors. It indicates how much equity cushion is available to absorb losses before the interests of debt holders would be impaired. The less leveraged the company, the safer the creditors’ interests.
Answer (A) is incorrect because Liquidity concerns how quickly cash can be made available to pay debts as they come due.
Answer (B) is incorrect because The debt to equity ratio evaluates a company’s capital structure and is thus oriented toward the balance sheet. It does not measure the use (profits) made of assets.
Answer (D) is incorrect because Solvency is the availability of assets to service debt. Technically, whenever the debt to equity ratio can be computed with a meaningful answer, it can be said that the firm is solvent because assets, by definition, have to exceed debts.
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