Which of the following ratios is considered a measure of a company’s ability to pay long-term debt?Group of answer choicesprice/earnings ratiotimes-interest-earned ratioacid-test ratioearnings per share of common stock
Question
Which of the following ratios is considered a measure of a company’s ability to pay long-term debt?Group of answer choicesprice/earnings ratiotimes-interest-earned ratioacid-test ratioearnings per share of common stock
Solution
The ratio that is considered a measure of a company’s ability to pay long-term debt is the times-interest-earned ratio. This ratio, also known as the interest coverage ratio, measures how many times a company can cover its interest charges on a pretax basis. It's calculated by dividing earnings before interest and taxes (EBIT) by the interest expense. A higher ratio indicates a better ability to cover interest charges, and thus a better ability to pay off long-term debt.
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