Solution
Option 1 -> Interest Coverage Ratio measures only the ability to pay interest expenses on debt, but does not consider preference share dividends or principal repayments.
Option 2 -> Debt Service Coverage Ratio measures the cash flow available from operations to service total debt obligations including debenture payments (interest + principal) and preference share dividends.
Option 3 -> Return on Investment measures the overall profitability of investments relative to their cost, not specifically the debt servicing capacity.
Option 4 -> Return on Equity measures profitability relative to shareholders' equity, not the ability to service debt and preference capital.
Hence, Option 2: Debt Service Coverage Ratio -> This ratio specifically establishes the relationship between cash profits generated by operations and the total cash required for servicing both debentures (debt obligations) and preference share capital (dividends). It comprehensively covers all fixed financial obligations that need to be paid from operating cash flows -> correct