What do debt ratios measure in a firm?

Debt ratios serve as key indicators of a firm's financial leverage and risk by demonstrating the proportion of total assets that are financed through debt. When looking at a company's balance sheet, the debt ratio formula typically takes the form of total liabilities divided by total assets. This calculation reveals how much of the company’s assets are funded by borrowed money, as opposed to equity provided by shareholders.

A higher debt ratio suggests that a firm is more leveraged, meaning it relies more on debt for financing, which can increase financial risk. Conversely, a lower debt ratio indicates that a firm has a more conservative financing structure, relying primarily on equity. Understanding this aspect is crucial for investors and analysts, as it plays a significant role in assessing a company's financial health and its capacity to manage obligations.

In contrast, the other options focus on different aspects of a firm's performance or financial metrics rather than its reliance on debt. For example, revenue generation capabilities relate to sales performance, while efficiency in utilizing fixed assets examines operational management. Additionally, average time to pay creditors pertains to cash flow management rather than the firm's capital structure. Thus, the focus of debt ratios on the relationship between total assets and total liabilities makes B the correct choice.