What does the interest cover formula assess?

The interest cover formula is a financial metric that assesses a company's ability to meet its interest payment obligations from its earnings. This is achieved by comparing a company's earnings before interest and taxes (EBIT) to its interest expenses. A higher interest cover ratio indicates that the company generates significantly more profit than is required to cover its interest, suggesting a robust financial position and reducing the risk of default on debt obligations.

In the context of the options presented, assessing the capacity to make interest payments from profit aligns precisely with the purpose of the interest cover formula. This formula helps stakeholders, such as investors and creditors, to evaluate the financial health of a company, particularly in relation to its debt servicing capabilities. It provides insight into how well a company can handle interest expenses in light of its profitability, which is crucial for financial planning and risk assessment.