Question

Which ratios measure the extent of a firm’s financing with debt relative to equity and its ability to cover interest and fixed charges?

a. Debt ratio and price-to-earnings ratio.
b. Cash flow adequacy and fixed charge coverage.
c. Days payable outstanding and gross profit margin.
d. Cash interest coverage and average collection period

Answer 1

The answer is B.

Step-by-step explanation:

Cash flow adequacy ratio is used to determine if cash flows generated from operating activities in a period are enough to repay the amount used to borrow non-current assets when due. A cash flow of 1 or greater than 1 means that the business is able to pay its debt comfortably while cash flow less than 1 means there is difficulty.

Fixed charge ratio measures if a business is able to cover its fixed finance cost or fixed interest payment The formula is EBIT/interest payment.