What does a coverage ratio measure?

A coverage ratio specifically measures an organization's ability to meet its long-term financial obligations, which is crucial for assessing financial health and stability. By analyzing various cash flow and debt metrics, coverage ratios help to determine if an organization generates enough income to cover its long-term debt obligations, ensuring it can maintain operations without risk of default.

This focus on an organization’s capacity to manage its debt is vital for stakeholders, as it reflects the financial sustainability and creditworthiness of the organization. For instance, a high coverage ratio typically indicates a lower risk of default, instilling confidence in investors and creditors regarding the organization's financial management.

Other options discuss different financial aspects but do not pertain to the specific focus of coverage ratios. Understanding this distinction is essential for interpreting financial health accurately.