Which ratio is used to assess a company's ability to cover debt payments from ongoing operations?

• A. Interest coverage ratio
• B. Quick ratio
• C. Price-to-earnings
• D. Dividend yield

Answer: (A)

The main idea being tested is whether a company's earnings from operations are sufficient to cover its interest obligations. This is measured by the times-interest-earned ratio, which compares operating income (often EBIT) to interest expense. A higher figure means the business earns enough from its core activities to comfortably meet interest payments, giving creditors and investors a sense of debt-service cushion. For example, if EBIT is $500,000 and interest expense is $100,000, the ratio is 5, indicating earnings cover interest five times over.

Other ratios look at different aspects: the quick ratio focuses on short-term liquidity with near-cash assets versus current liabilities, not debt service from ongoing operations; the price-to-earnings ratio relates stock price to earnings and speaks to valuation rather than debt coverage; dividend yield reflects cash paid to shareholders, not operating debt obligations.