A times interest earned ratio of 5 indicates the firm:
A) pays 5 times its earnings in interest expense.
B) earns significantly more than its interest obligations.
C) has interest expense equal to 5% of EBIT.
D) has a low tax liability.

Question

Quizplus · Accepted Answer

A times interest earned (TIE) ratio of 5 means that the company's earnings before interest and taxes (EBIT) are five times greater than its interest expense. This indicates that the company has sufficient earnings to cover its interest payments and suggests financial strength and stability. Option A is incorrect as the ratio indicates the opposite. Option C is partly correct, but it only provides information on the percentage of EBIT used for interest expense, whereas the TIE ratio is a multiple of interest expense. Option D is not relevant to the TIE ratio.

A Times Interest Earned Ratio of 5 Indicates the Firm