What is the term for a liquidity ratio that measures both short-term and long-term debt?

What is the term for a liquidity ratio that measures both short-term and long-term debt?

• A. Current ratio
• B. Debt coverage ratio
• C. Cash ratio
• D. Quick ratio

Answer: (B)

The debt coverage ratio is indeed a liquidity measure that assesses an organization's ability to service its debt, considering both short-term and long-term financial obligations. It provides insight into a company's cash flow relative to its debt payments, serving as an important indicator of financial stability and risk. Investors and creditors often look at this ratio to evaluate whether a company generates enough income to cover its debts, including principal and interest payments on both short and long-term liabilities. In contrast, the current ratio focuses solely on short-term assets versus short-term liabilities, the cash ratio is even more restrictive as it only considers cash and cash equivalents against current liabilities, and the quick ratio (also known as the acid-test ratio) excludes inventory to provide a more stringent test of liquidity. Each of these ratios serves a different purpose in assessing a company's financial health, but only the debt coverage ratio encompasses both short-term and long-term obligations, making it uniquely suited for evaluating overall debt-servicing capability.

The debt coverage ratio is indeed a liquidity measure that assesses an organization's ability to service its debt, considering both short-term and long-term financial obligations. It provides insight into a company's cash flow relative to its debt payments, serving as an important indicator of financial stability and risk. Investors and creditors often look at this ratio to evaluate whether a company generates enough income to cover its debts, including principal and interest payments on both short and long-term liabilities.

In contrast, the current ratio focuses solely on short-term assets versus short-term liabilities, the cash ratio is even more restrictive as it only considers cash and cash equivalents against current liabilities, and the quick ratio (also known as the acid-test ratio) excludes inventory to provide a more stringent test of liquidity. Each of these ratios serves a different purpose in assessing a company's financial health, but only the debt coverage ratio encompasses both short-term and long-term obligations, making it uniquely suited for evaluating overall debt-servicing capability.