A times-interest-earned ratio of 3.5 indicates that the firm:
A) pays 3.5 times its earnings in interest expense.
B) has interest expense equal to 3.5% of EBIT.
C) has interest expense equal to 3.5% of net income.
D) has EBIT equal to 3.5 times its interest expense.

Question

Quizplus · Accepted Answer

A times-interest-earned ratio of 3.5 means that the firm has EBIT (earnings before interest and taxes) equal to 3.5 times its interest expense. This indicates that the firm's operating income is significantly higher than its interest expense, which is a positive sign for creditors and investors.

A Times-Interest-Earned Ratio of 3