The fourth and final fundamental test every stock investor should use is the Debt Ratio Trend.
The debt ratio (long-term debt divided by total capital, which is combined long-term debt and stockholder's equity) can be overlooked, but it is the most important test of working capital.
The current ratio (current assets divided by current liabilities) can be misleading, especially if the company has allowed its long-term debt to grow in order to bolster cash, accounts receivable and inventory to keep the current test steady. A growing long-term debt is a big problem, because it translates to ever-higher interest and debt service in the future, and that means less capital remains for expansion or dividends. You want to see a steady or declining debt ratio from year to year, not growing levels.
