Final answer:
The interest coverage ratio measures a company's ability to pay interest on its debt. In this case, Chutes & Co.'s interest coverage ratio is 3, indicating a healthy ability to cover its interest payments.
Step-by-step explanation:
The interest coverage ratio measures a company's ability to pay interest on its debt. It is calculated by dividing the company's earnings before interest and taxes (EBIT) by its interest expense. In this case, the operating margin of 10% on total sales of $30.0 million indicates that the company's EBIT is $3.0 million.
Therefore, the interest coverage ratio can be calculated as:
Interest Coverage Ratio = EBIT / Interest Expense
Interest Coverage Ratio = $3.0 million / $1.0 million
Interest Coverage Ratio = 3
This means that Chutes & Co.'s earnings before interest and taxes are three times its interest expense, indicating a healthy ability to cover its interest payments.