Final answer:
Ratios that make debtholders feel safer and contribute to higher debt ratings include the interest coverage ratio, debt service coverage ratio, current ratio, and to a lesser extent, the leverage ratio. Higher values for these ratios suggest better debt repayment capacity and liquidity, increasing creditor confidence and potentially leading to better credit ratings.
Step-by-step explanation:
The ratios that make debtholders feel safer about getting their promised payments and result in higher ratings on debt are primarily the interest coverage ratio, debt service coverage ratio, and the current ratio. The leverage ratio is also important, but in a slightly different way. A lower leverage ratio indicates less reliance on debt, which can be perceived as less risky by debtholders.
The interest coverage ratio measures a company's ability to meet its interest obligations from its current earnings. A higher interest coverage ratio indicates a greater ability to pay interest expenses, which makes debtholders more comfortable.
The debt service coverage ratio is a measurement of cash flow available to pay current debt obligations. It shows the ability to produce enough cash to cover debt payments, with a higher ratio indicating a better ability to pay, resulting in increased confidence from creditors.
The current ratio compares a company's current assets to its current liabilities, with a higher ratio suggesting that a company has enough assets to cover its short-term liabilities. This can reassure debtholders about a company's liquidity and its ability to meet short-term debt obligations.
While the leverage ratio does not directly indicate the ability to make payments, it does provide insight into the overall debt level of a company. A lower leverage ratio, indicating less debt relative to equity, can support a better credit rating because it shows that a company is not overburdened by debt.