Which ratio represents interest coverage?

Which ratio represents interest coverage?

• A. Debt/Equity
• B. Net Debt/EBITDA
• C. EBITDA/Interest Expense
• D. Current Ratio

Answer: (C)

Interest coverage looks at how many times a company can pay its interest from operating earnings. Expressing this as EBITDA divided by interest expense shows how many dollars of EBITDA are available to cover each dollar of interest. A higher result means a stronger ability to service debt. The other ratios measure different aspects: Debt/Equity reflects financing mix, Net Debt/EBITDA gauges leverage and repayment capacity, and the Current Ratio assesses short-term liquidity. So EBITDA/Interest Expense is the ratio that directly represents interest coverage.

Interest coverage looks at how many times a company can pay its interest from operating earnings. Expressing this as EBITDA divided by interest expense shows how many dollars of EBITDA are available to cover each dollar of interest. A higher result means a stronger ability to service debt. The other ratios measure different aspects: Debt/Equity reflects financing mix, Net Debt/EBITDA gauges leverage and repayment capacity, and the Current Ratio assesses short-term liquidity. So EBITDA/Interest Expense is the ratio that directly represents interest coverage.