Question
What does the coverage ratio show?
It shows how many times a company’s earnings can cover the fixed-interest payments on its short-term debt
It shows how many times a company’s earnings can cover the fixed-interest payments on its long-term debt
It shows the earnings before interest and taxes
None of the above
It shows how many times a company’s earnings can cover the fixed-interest payments on its short-term debt
It shows how many times a company’s earnings can cover the fixed-interest payments on its long-term debt
It shows the earnings before interest and taxes
None of the above
Answers
GPT-4o mini
The coverage ratio generally refers to how well a company's earnings can cover its fixed financial obligations, such as interest payments. Depending on the specific context, it can be related to either short-term or long-term debt.
The most common coverage ratio is the **Interest Coverage Ratio**, which specifically measures how many times a company's earnings (often represented by earnings before interest and taxes, or EBIT) can cover its interest payments. Therefore, the correct interpretation among the choices provided in your question is:
**It shows how many times a company’s earnings can cover the fixed-interest payments on its long-term debt.**
It's worth noting that while some variations of coverage ratios might look at short-term obligations, the most significant and commonly referenced would be for long-term debt, specifically regarding interest payments.
The most common coverage ratio is the **Interest Coverage Ratio**, which specifically measures how many times a company's earnings (often represented by earnings before interest and taxes, or EBIT) can cover its interest payments. Therefore, the correct interpretation among the choices provided in your question is:
**It shows how many times a company’s earnings can cover the fixed-interest payments on its long-term debt.**
It's worth noting that while some variations of coverage ratios might look at short-term obligations, the most significant and commonly referenced would be for long-term debt, specifically regarding interest payments.