Final answer:
Financial ratios, such as the current ratio, are essential for evaluating a firm's ability to pay current liabilities effectively.
Explanation:
Financial ratios should be used to evaluate a firm's ability to pay its current liabilities. One specific financial ratio that helps in this evaluation is the current ratio, which compares current assets to current liabilities and indicates the firm's short-term liquidity.
By analyzing the current ratio, investors and analysts can assess whether a company has enough liquid resources to cover its short-term obligations efficiently. This ratio provides valuable insights into a firm's financial strength and ability to meet its current liabilities.
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