What is the formula for the interest coverage ratio?

The interest coverage ratio evaluates a company's ability to pay interest on its outstanding debt, providing insight into its financial health and risk associated with its capital structure. The correct formula for this ratio is EBIT (Earnings Before Interest and Taxes) divided by the interest expense. This relationship is important because it illustrates how much a company earns before considering interest payments, relative to the interest it must pay on its debt.

Using EBIT in the formula accounts for the company's operational earnings and allows for a clearer understanding of how well those earnings cover interest obligations. A higher ratio indicates that a company has a stronger capability to meet its interest payments, suggesting lower financial risk. This contrasts with the other options presented, which utilize different financial metrics that do not specifically measure the company’s ability to cover interest expenses directly.