Question

Which of the following ratios are used to evaluate a company's ability to pay long-term debts?

1) Current ratio
2) Debt-to-equity ratio
3) Interest coverage ratio
4) Return on assets ratio

Answer 1

The debt-to-equity ratio and interest coverage ratio are the financial measures used to assess a company's ability to pay long-term debts.

Step-by-step explanation:

The ratios used to evaluate a company's ability to pay long-term debts include the debt-to-equity ratio and the interest coverage ratio. The debt-to-equity ratio compares the company's total liabilities to its shareholder equity, providing insight into the company's leverage and its capacity to use shareholder funds to cover debts. The interest coverage ratio measures how easily a company can pay interest on outstanding debt with its current earnings, which is crucial for assessing long-term financial stability.