The times interest earned ratio indicates:
A) The margin of safety provided to creditors.
B) The extent of "trading on the equity" or financial leverage.
C) Profitability without regard to how resources are financed.
D) The effectiveness of employing resources provided by owners.

Question

Quizplus · Accepted Answer

The times interest earned ratio measures a company's ability to meet interest payments on their debt obligations. This ratio is important to creditors because it indicates the margin of safety they have in case the company is unable to make its interest payments. Therefore, the best answer is option A. B is incorrect because financial leverage is measured by the debt to equity ratio. C and D are incorrect because they do not directly relate to the company's ability to meet interest payments.

The Times Interest Earned Ratio Indicates