Which ratio indicates a company's ability to meet long-term financial obligations?

The debt-equity ratio is a critical measure used to evaluate a company's financial structure and its ability to meet long-term obligations. This ratio compares the total debt of a company to its total equity, showcasing how much of the company's financing comes from creditors versus shareholders. A higher debt-equity ratio indicates that a company is heavily reliant on debt for financing, which can increase financial risk, especially if the company faces difficulties in generating sufficient revenue to cover its obligations.

Understanding the debt-equity ratio is essential for investors and creditors as it provides insight into the company's leverage and the potential risks associated with its capital structure. Companies with lower ratios are often seen as more stable and better positioned to weather financial downturns, as they are not overly dependent on borrowing. This capability to manage long-term liabilities is a key aspect of financial health and sustainability.

In contrast, the current ratio focuses on short-term financial health, the profit margin assesses profitability rather than solvency, and return on assets measures the efficiency in using assets to generate profit. Each of these ratios provides valuable information but does not specifically indicate a company's capability to address long-term financial responsibilities as effectively as the debt-equity ratio does.