Which of the following relationships for a specific company is most likely to be true?

Select one:

a. Debt-to-equity ratio < Debt-to-assets ratio

b. ROE < ROA

c. Gross margin < profit margin

d. acid test ratio < current ratio

Option D

Acid test ratio < current ratio

Current ratio is a ratio which shows the relationship between current assets and current liabilities of a company. It shows a firm's ability to pay its short-term liabilities and obligation. It is computed using the equation given below:

Current ratio = Current assets ÷ Current liabilities

Quick ratio (QR) or acid test ratio is a ratio which shows the relationship between quick assets (QA) and current liability (CL) of the entity. Quick assets consist of Current assets after excluding inventory and prepaid expenses of the company. Quick assets are maintained by the company so that they can convert them into cash whenever needed by the company.

It is computed using the equation given below:

Acid-test ratio = Quick Assets ÷ Current Liabilities

Acid test ratio of a company is always lower than the current ratio because acid test ratio deducts the amount of inventory from the current assets.

Therefore, all the remaining relationships are false because debt-to-equity ratio is always greater than debt-to-assets ratio, return on equity (ROE) is always higher than return on assets (ROA) because the value of equity is less than total assets of the company. Gross margin is always higher than the profit margin of the company because profit margin is computed after deducting the operating profit from the gross margin.

Hence, the acid test ratio is always lower than current ratio (acid test ratio < current ratio) is the only relation which is true for a specific company.