What ratio is used to assess how much debt a company can handle?

The most appropriate ratio to assess how much debt a company can handle is encapsulated in the concept of leverage and coverage ratios. These ratios provide insights into a company's ability to manage its debt obligations in relation to its earnings and other metrics.

Leverage ratios typically include the debt-to-equity ratio and the debt-to-assets ratio, which assess the proportion of debt compared to equity or assets. Coverage ratios, on the other hand, focus on a company's ability to meet its debt obligations from its earnings, such as the interest coverage ratio, which measures how easily a company can pay interest on outstanding debt.

These ratios collectively give a comprehensive view of a company’s capital structure and its capacity to support debt incurred. By analyzing both leverage and coverage ratios, one can better understand the company's risk profile regarding its debt level and financial health.

The other choices do not specifically assess a company's capacity to handle debt. The debt-to-equity ratio does relate to debt levels, but it is only one of many leverage ratios. Return on equity is more focused on profitability and not on debt management. The current ratio pertains to liquidity rather than debt levels, measuring short-term financial health rather than long-term leveraged risk. Consequently, leverage and coverage ratios provide the most thorough assessment of a