What does the Interest Coverage Ratio evaluate?
AShort-term asset turnover
BA firm's ability to satisfy interest payments on outstanding debt
CThe ratio of net profit to total revenue
DDividend payout ratio
Explanation
Core Concept: Interest Coverage Ratio = EBIT / Interest Expense. It gauges how comfortably a company can pay interest on its debt from operating profits. Context/Distractors: Asset turnover evaluates operational efficiency, profit margin measures profitability, and dividend payout relates to equity distribution. Exam Tip/Key Fact: A higher coverage ratio indicates a lower risk of default or financial insolvency.
Exam Relevance
- Topic: Financial Statement Analysis
- Subtopic: Solvency Ratios
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