A times interest earned ratio of 5.0 indicates that 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 percent of EBIT
D)Has low tax liability

Question

Quizplus · Accepted Answer

The times interest earned ratio (also known as interest coverage ratio) indicates how able a company is to meet its interest obligations out of its earnings. A ratio of 5.0 means that the company earns five times more than its interest expense, which is a good sign of financial health and ability to handle debt. Answer A is incorrect as it suggests the firm pays out 5 times its earnings in interest which is not viable for a company. Answer C is partially correct but does not highlight the whole picture. Answer D is not directly related to the times interest earned ratio.

A Times Interest Earned Ratio of 5