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% of EBIT.
D) has low tax liability.

Question

Quizplus · Accepted Answer

A times interest earned ratio of 5.0 means that the firm is earning five times more than its interest obligation. The ratio is calculated by dividing earnings before interest and taxes (EBIT) by interest expense, so it does not indicate how much is paid in interest expense, what percentage of EBIT is used for interest expense, or the firm's tax liability.

A Times Interest Earned Ratio of 5