Which of the following ratios is the best measure in analyzing a company's ability to pay interest on long-term debt and to repay the long-term debt over several years?
A)Debt-to-equity ratio
B)Times interest earned ratio
C)Debt service coverage ratio
D)Acid-test ratio

Question

Quizplus · Accepted Answer

The debt service coverage ratio is the best measure in analyzing a company's ability to pay interest on long-term debt and to repay the long-term debt over several years. This ratio indicates the number of times the company's operating income can cover its debt service obligations, including principal and interest payments. A higher debt service coverage ratio indicates a better ability to service and repay long-term debt. Option A, the debt-to-equity ratio, indicates the proportion of a company's financing that is provided by equity and debt. While it provides information on the company's leverage, it doesn't directly measure its ability to repay long-term debt. Option B, the times interest earned ratio, only considers a company's ability to pay interest on its debt but not the repayment of the debt. Option D, the acid-test ratio, measures a company's ability to pay its current liabilities with its current assets and doesn't provide insight into long-term debt repayments.

Which of the Following Ratios Is the Best Measure in Analyzing