A credit analyst determines the following selected financial ratios for three firms in an industry after making all appropriate adjustments:
In evaluating the creditworthiness of these firms, the analyst should conclude that:
EBIT / interest is a coverage ratio and debt / capital is a leverage ratio. Higher interest coverage and lower leverage are favorable for creditworthiness. Of the three companies given, Knight has the highest interest coverage and Lawrence has the lowest leverage. EBIT / revenue (operating profit margin) is a profitability ratio and revenue / assets (asset turnover) is an operating ratio.