What ratio measures a firm's ability to make contractual interest payments?

The times interest earned ratio is the correct measure of a firm's ability to make contractual interest payments. This ratio quantifies how many times a company can cover its interest expenses with its earnings before interest and taxes (EBIT). It provides insight into the firm's financial health and its capacity to meet interest obligations.

By calculating this ratio, stakeholders can assess the degree to which a company generates sufficient income to pay interest on its debt. A higher ratio indicates a stronger ability to service debt, which can reassure investors and creditors about the company’s financial stability. This is particularly important in evaluating a company's risk profile, as a firm with a lower times interest earned ratio may struggle to meet its interest payments, potentially leading to financial distress.

The other options, including the debt-to-equity ratio, current ratio, and quick ratio, serve different purposes. The debt-to-equity ratio provides insights into the company's financial leverage; the current ratio measures short-term liquidity while considering current assets relative to current liabilities; and the quick ratio serves a similar purpose but with a stricter focus by excluding inventory from current assets. None of these directly evaluates the firm's capacity to make its interest payments, which is why the times interest earned ratio is the appropriate choice for this assessment.