Which ratio would be best for measuring a company's ability to repay both principal and interest on outstanding loans from cash generated from operating activities?
A) Current ratio
B) Times-interest-earned ratio
C) Debt service coverage ratio
D) Debt-to-equity ratio

Question

Quizplus · Accepted Answer

The Debt Service Coverage Ratio (DSCR) measures a company's ability to repay both principal and interest on outstanding loans using cash generated from operating activities. It is calculated by dividing a company's operating income by its total debt service obligations. A DSCR of 1 or higher indicates that a company is generating enough cash flow to cover its debt obligations. Therefore, the DSCR is the best ratio for measuring a company's ability to repay loans from cash generated from operating activities. The current ratio measures a company's ability to pay short-term obligations, while the times-interest-earned ratio measures a company's ability to pay interest on its debt. The debt-to-equity ratio measures a company's leverage or debt financing relative to equity financing.

Which Ratio Would Be Best for Measuring a Company's Ability