What does a higher interest coverage ratio imply?

A higher interest coverage ratio indicates that a company has a greater ability to meet its interest obligations, meaning it can easily cover its interest payments with its earnings before interest and taxes (EBIT). This ratio is calculated by dividing EBIT by the interest expense, and a higher ratio signifies that the company earns significantly more than its interest expenses.

This suggests financial stability and lower risk concerning debt obligations, as the company generates sufficient income to handle its interest costs comfortably. If the ratio is high, it generally implies good liquidity and the possibility of maintaining or even increasing debt levels without financial distress. In contrast, a lower ratio could raise concerns about the company’s ability to pay interest, potentially leading to default. Thus, option B accurately captures the essential meaning of a higher interest coverage ratio.