Which ratio best measures ability to pay interest expenses?[Fill in the blank]

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BlackTom AI · Accepted Answer

To determine which ratio best measures ability to pay interest expenses, we evaluate how each metric relates to the company’s capacity to cover interest costs.
Option a: EBITDA/Interest expense. This is a common interest-coverage measure, using earnings before interest, taxes, depreciation, and amortization to see how many times a company can cover its interest payments. Since EBITDA (or EBIT) represents operating earnings available to service debt, dividing by interest expense directly assesses the cushion available to meet interest obligations. This one aligns with the core concept of interest coverage.
Option b: Debt/EBITDA. This ratio, often called the debt-to-EBITDA or leverage ratio, focuses on how many times a company can generate EBITDA relative to its total debt load. While it informs leverage and default risk, it does not directly measure ability to pay interest expenses in the near term; it weighs overall indebtedness against earnings, not the immediate interest burden.
Option c: Debt/Capital. This is a balance-sheet focused measure of financial structure, indicating what portion of the capital comes from debt. It tells you about leverage composition but not specifically about the company’s ability to service interest in the near term, so it’s less direct for interest coverage.
Option d: Free cash flow/Debt. This ratio ties free cash flow to debt, highlighting cash available to reduce debt. Although informative about cash generation versus debt, free cash flow can be affected by capital expenditures and working capital needs, and it isn’t a pure measure of the ability to meet interest obligations on a regular basis.
In summary, among the given options, the ratio that most directly expresses the capacity to cover interest payments is the EBITDA/Interest expense metric, since it translates operating earnings into a direct measure of interest coverage. The other options provide useful insights into leverage, capital structure, or cash-driven debt repayment, but they do not quantify the immediate ability to service interest in the same direct way.

Which ratio best measures ability to pay interest expenses?[Fill in the blank]

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