Answer: interest coverage

## Explanation **Step 1: Calculate Year 2 ratios from the provided data** 1. **Interest Coverage Ratio (Year 2)**: - EBIT = £1,015.0 million - Interest Expense = £73.4 million - Interest Coverage = EBIT / Interest Expense = 1,015.0 / 73.4 = **13.8×** 2. **Debt-to-Total Assets Ratio (Year 2)**: - Total Debt = £1,048.0 million - Total Assets = £5,305.0 million - Debt-to-Total Assets = Total Debt / Total Assets = 1,048.0 / 5,305.0 = **19.8%** 3. **Operating ROA (Year 2)**: - EBIT = £1,015.0 million - Average Total Assets = £5,421.0 million - Operating ROA = EBIT / Average Total Assets = 1,015.0 / 5,421.0 = **18.7%** **Step 2: Compare Year 2 ratios with Year 1 ratios** - **Interest Coverage**: - Year 1: 15.3× - Year 2: 13.8× - **Change**: Decreased from 15.3× to 13.8× (worsened) - **Debt-to-Total Assets**: - Year 1: 18.2% - Year 2: 19.8% - **Change**: Increased from 18.2% to 19.8% (worsened) - **Operating ROA**: - Year 1: 17.3% - Year 2: 18.7% - **Change**: Increased from 17.3% to 18.7% (improved) **Step 3: Determine which ratio indicates improvement in creditworthiness** **Creditworthiness** refers to a company's ability to meet its debt obligations. Key creditworthiness indicators include: 1. **Interest Coverage Ratio**: Measures ability to pay interest expenses from operating earnings. Higher is better for creditworthiness. 2. **Debt-to-Total Assets Ratio**: Measures financial leverage and risk. Lower is better for creditworthiness. 3. **Operating ROA**: Measures operating efficiency and profitability. Higher is generally better, but it's more about profitability than direct creditworthiness. **Analysis**: - **Interest Coverage** decreased (15.3× to 13.8×) → **Worsened creditworthiness** - **Debt-to-Total Assets** increased (18.2% to 19.8%) → **Worsened creditworthiness** - **Operating ROA** increased (17.3% to 18.7%) → **Improved profitability, but not a direct creditworthiness indicator** **Step 4: Why the question asks which ratio "most likely indicates an improvement"** The question is testing whether you recognize that while operating ROA improved, the two direct creditworthiness ratios (interest coverage and debt-to-assets) actually worsened. Therefore, **none** of the ratios show improvement in creditworthiness. However, since the question asks which "most likely indicates an improvement," and we must choose from the options, we need to consider: - Operating ROA improvement could indirectly suggest better ability to service debt through higher profitability. - The other two ratios directly show deterioration in credit metrics. **Step 5: Conclusion** Given that: 1. Interest coverage and debt-to-assets ratios directly worsened 2. Operating ROA improved 3. Improved profitability (ROA) could support better debt service capacity over time The **operating ROA** (Option A) is the only ratio showing improvement, and while not a direct creditworthiness metric, it could indicate potential for improved creditworthiness through better profitability. **Answer: A (operating ROA)**

Author: LeetQuiz .