Series 79 practice questioneasyLeverage Ratios
Which ratio would an investment banker most likely use to measure a company’s ability to cover its interest payments?
- ACurrent Ratio
- BDebt/Equity Ratio
- CInterest Coverage Ratio✓ Correct answer
- DReturn on Equity
Explanation
Why C — Interest Coverage Ratio
The interest coverage ratio (usually EBIT/interest expense) measures how many times a company's earnings can cover its interest payments. The other ratios measure liquidity, leverage, or profitability.
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