The times interest earned ratio is deﬁned as:
A) Net income divided by interest expense.
B) Interest expense divided by net income.
C) EBIT divided by interest expense.
D) Interest expense divided by EBIT.
E) Sales divided by interest expense.

Question

Quizplus · Accepted Answer

The times interest earned ratio measures a company's ability to meet its interest payments with its operating earnings. Option C is correct because EBIT (earnings before interest and taxes) is used as a numerator, which represents a company's ability to pay interest before taking into consideration its tax obligations. Options A, B, D, and E are incorrect because they do not use a measure of a company's operating earnings in the numerator.

The Times Interest Earned Ratio Is Deﬁned As