Which of the following solvency ratios is the best measure of a company's ability to pay interest and maturing principal amounts on its long-term debt?
A)Debt-to-equity ratio
B)Times interest earned ratio
C)Debt service coverage ratio
D)Earnings per share

Question

Quizplus · Accepted Answer

The debt service coverage ratio is calculated by dividing the company's net operating income by its total debt service. This ratio measures a company's ability to meet its debt obligations, including both interest and principal payments. A higher debt service coverage ratio indicates a company has more earnings available to cover its debt payments and is therefore considered a better measure of solvency for long-term debt obligations. The other ratios listed do not directly measure a company's ability to pay interest and maturing principal amounts on long-term debt.

Which of the Following Solvency Ratios Is the Best Measure