What do the current ratio and debt ratio help to evaluate?

The current ratio and debt ratio are financial metrics that are essential in evaluating a company's financial health, particularly in relation to its debt levels. The current ratio measures a company's ability to meet its short-term obligations with its current assets, indicating liquidity. On the other hand, the debt ratio evaluates the proportion of a company’s total assets that are financed through debt, which gives insights into the leverage and financial risk of the entity.

When assessing the health of a company's debt, these two ratios provide a comprehensive view. A strong current ratio suggests that the company has sufficient assets on hand to cover its current liabilities, thereby reflecting short-term financial stability. The debt ratio reveals how much of the company’s funding comes from debt, helping stakeholders understand the long-term solvency and risk related to capital structure.

This focus on debt management and financial obligation assessment aligns perfectly with evaluating healthy levels of debt, making this the most accurate interpretation of what these two ratios help to establish.