Final answer:
Ratios that measure a firm's ability to get more debt are called leverage ratios. These ratios assess a company's long-term financial obligations and use of debt for financing. Firms can raise financial capital through profits, borrowing, or issuing stock, each with its own advantages and trade-offs.
Step-by-step explanation:
Ratios that focus on the level of a firm's financial flexibility, including its ability to obtain more debt, are known as leverage ratios. These ratios are critical for understanding how well a firm can meet its long-term financial obligations and often indicate how much a company relies on debt to finance its activities. When a firm has a record of earning significant revenues, and even better, of earning profits, it can confidently approach sources of financial capital such as banks and bond markets to borrow money.
Accessing financial capital allows firms to invest in equipment, structures, and research and development, which are essential for growth. Companies may reinvest their own profits or seek external capital sources when profits are insufficient. While borrowing through banks or bonds commits a firm to scheduled interest payments, it allows the firm to maintain control over its operations. In contrast, issuing stock entails selling company ownership and being accountable to shareholders.