What does the interest coverage ratio assess?

The interest coverage ratio is a financial metric that evaluates a company’s ability to meet its interest obligations on outstanding debt. Specifically, it measures the relationship between a company’s earnings before interest and taxes (EBIT) and its interest expenses. A higher interest coverage ratio indicates that a company generates sufficient earnings to comfortably cover its interest payments, reflecting financial stability and lower risk for creditors. This metric is essential for investors and analysts as it provides insight into the firm’s financial health and its capacity to manage debt.

Other options focus on different financial aspects: one examines revenue growth over time, another looks at the company's ability to pay current liabilities, and the last one pertains to equity profitability—all of which are important but do not specifically address the company's capability to handle interest payments. This highlights why understanding the interest coverage ratio is crucial in assessing financial leverage and risk.