Question

. Lower percentage or multiples of this financial ratio is good for bond investors. What is this?

(1) Interest coverage ratio

(2) Return on invested capital

(3) Debt coverage ratio

(4) Return on assets

Answer 1

1) Interest coverage ratio:- Interest coverage ratio measures the company's ability to pay its debt. It may be calculated by dividing EBIT or EBITDA by total interest expense. Higher the ratio better it is for investors, as the chance of getting the money back would be higher.

2) Return on invested capital:- It measures the return from the capital invested by the shareholders and debtholders. It should be compared to the cost of capital of company to determine whether the company is creating value. Higher the percentage of this ratio, more the return company would be generating, and better for the investors because they will be getting paid more and timely.

3)Debt coverage ratio:- This ratio measures the ability of the firm to produce enough cash to pay its debts. It is calculated by dividing net operating income by total debt service. Higher the ratio better for the investors, as the chance to get their money back increases and the company also survives for longer.

4) Return on assets:- It measures the amount of profit the company earns on its assets . It is calculated by dividing the net income by total assets. Higher the ratio, better it is for the company as the company becomes more profitable and efficient.