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The effective interest rate is calculated by taking the net interest expense and dividing it by the usable funds. This method provides a clear picture of the actual cost of borrowing relative to the funds available for that borrowing. By using net interest expense, which is often the total interest paid minus any interest income received, the calculation captures the true cost of borrowing.

Usable funds represent the amount of capital that is actually available for borrowing or investment purposes. By comparing net interest expense to usable funds, businesses can gain insights into their cost of financing in relation to the capital they have at their disposal. This is particularly useful for evaluating the financial health and efficiency of a business in managing its debts and capital structure.

The ratios involving net sales, total assets, total interest paid, or total debt do not directly address the calculation of effective interest rates. While they can provide valuable information about overall financial performance and leverage, they do not specifically reflect the relationship between interest expense and the funds available.