Which of the following is a key lending ratio used to evaluate the financial capacity of a business?

The debt to equity ratio is a crucial lending ratio used to evaluate a business's financial capacity because it assesses the relative proportion of the company's financing derived from creditors versus shareholders. This ratio provides insight into the level of financial leverage employed by the business and indicates the risk associated with its capital structure.

A higher debt to equity ratio suggests that a company relies more on borrowed funds for its operations, which may heighten financial risk, especially in times of economic downturn. Conversely, a lower ratio indicates a more conservative approach with less reliance on debt, which typically suggests lower risk to lenders. Lenders often prefer to see a balanced ratio that demonstrates the company's ability to manage its obligations while maintaining enough equity to cushion against potential losses.

Other ratios like return on equity, price to earnings, and current ratio serve different purposes. Return on equity measures profitability efficiency; price to earnings assesses market valuation in relation to earnings; and current ratio evaluates short-term liquidity. While these are important financial metrics, they do not specifically reflect a business’s capacity to manage debt in the way that the debt to equity ratio does.