Which financial metric indicates a company’s ability to meet interest obligations?

The interest coverage ratio is a key financial metric that measures a company’s ability to pay interest expenses on its outstanding debt. It is calculated by dividing a company's earnings before interest and taxes (EBIT) by its interest expenses. A higher ratio indicates that the company has a greater ability to meet its interest obligations, suggesting a lower risk of default.

This ratio is particularly important for creditors and investors, as it provides insight into how well a company can cover its interest payments from its earnings. If the ratio is low, it may indicate financial stress, whereas a high ratio typically signifies financial stability and sufficient earnings to manage debt obligations comfortably.

Other financial metrics, while relevant to a company's performance or financial health, serve different purposes and do not specifically indicate the company's capacity to meet interest obligations. For instance, the asset turnover ratio relates to efficiency in using assets to generate sales, the debt-to-equity ratio provides insights into the company’s financial leverage, and the operating margin reflects operational efficiency in generating profit from sales.