What does the interest coverage ratio indicate?

The interest coverage ratio is a financial metric that assesses a company's ability to meet its interest obligations on outstanding debt. It is calculated by dividing the company's earnings before interest and taxes (EBIT) by its interest expenses. A higher ratio indicates a greater ability to pay interest, suggesting that the company generates sufficient earnings to cover its interest payments comfortably. This ratio is crucial for investors and creditors as it provides insight into the financial stability of a company and its risk of defaulting on loans.

The other options focus on different aspects of a company's finances. For example, the ability to pay dividends directly relates to profit distribution and shareholder returns, while managing operational costs pertains to the efficiency of business operations. Similarly, generating revenue refers to the sales aspect of a business, which can indirectly impact the ability to cover interest payments but does not directly measure that capability. Thus, the interest coverage ratio specifically highlights the company's financial health in terms of servicing its debt obligations.