Final answer:
The dividend coverage ratio helps understand how easily a company can cover its dividend payments. It falls under the category of profitability because it measures the company's ability to generate enough profits to pay dividends to its stock owners.
Step-by-step explanation:
The dividend coverage ratio helps understand how easily a company can cover its dividend payments. It falls under the category of profitability because it measures the company's ability to generate enough profits to pay dividends to its stock owners.
This ratio is calculated by dividing the company's net income by the total amount of dividends paid. A higher ratio indicates that the company has more than enough profits to cover its dividend obligations, which is a positive sign of financial health and stability.
For example, if a company has a net income of $1,000 and pays $200 in dividends, the dividend coverage ratio would be 5 ($1,000 divided by $200). This means that the company generates five times more profits than it needs to cover its dividend payments.