Assertion (A): Profitability ratios are calculated to analyse the earning capacity of the business. Reason (R): Profitability ratios are calculated to determine the ability of the business to service its debt in the long run. In the light of the above two statements which of the following is correct:

Question

KollegeApply · Accepted Answer

(A) is correct but (R) is wrong. Explanation: Profitability ratios measure a company’s earning potential and overall performance, the assertion is correct. Solvency ratios, rather than profitability ratios, are used to determine a company’s capacity to service long-term debt. As a result, the assertion is correct while the reasoning is wrong.

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