Answer: Fixed charge coverage

### Explanation **Option A (Return on equity)** is incorrect because it is a **profitability ratio** that measures the return earned by a company on its equity capital, including minority equity, preferred equity, and common equity. The formula for ROE is: \[ \text{ROE} = \frac{\text{Net income}}{\text{Average total equity}} \] This ratio does not directly assess a company's ability to cover debt payments. **Option B (Fixed asset turnover)** is incorrect because it is an **activity ratio** (also known as an asset utilization or operating efficiency ratio). It measures how efficiently a company generates revenue from its investments in fixed assets. The formula is: \[ \text{Fixed asset turnover} = \frac{\text{Revenue}}{\text{Average net fixed assets}} \] While this ratio evaluates operational efficiency, it does not address debt coverage. **Option C (Fixed charge coverage)** is correct because it is a **solvency ratio**, specifically a **coverage ratio**. Coverage ratios focus on the income statement and measure a company's ability to meet its debt obligations. The formula for the fixed charge coverage ratio is: \[ \text{Fixed charge coverage ratio} = \frac{\text{EBIT} + \text{Lease payments}}{\text{Interest payments} + \text{Lease payments}} \] A higher ratio indicates stronger solvency, providing greater assurance that the company can service its debt (e.g., bank debt, bonds, notes, and leases) from normal earnings. This makes it the most appropriate ratio for evaluating a company's ability to cover its debt payments.

Author: LeetQuiz Editorial Team