Which calculation is critical for assessing a company's ability to cover interest expenses?

The Times Interest Earned Ratio is a critical calculation for assessing a company's ability to cover its interest expenses. This ratio measures the company's earnings before interest and taxes (EBIT) relative to its interest expenses. A higher ratio indicates that the company earns significantly more than its interest obligations, suggesting a strong capacity to meet those expenses without jeopardizing its financial stability.

This ratio is particularly important for lenders and investors as it provides insight into the firm's financial health and its ability to consistently generate sufficient profit to service its debt. In contrast, the other options focus on different aspects of the business's financial performance. For example, the Months Supply of Spec Homes relates to inventory management in the real estate sector, while Return on Equity measures the profitability relative to shareholders' equity, and the Operating Expense Ratio evaluates operational efficiency. None of these options specifically address the ability to cover interest payments as directly as the Times Interest Earned Ratio does.