The times interest earned ratio reflects: Multiple Choice Ο A company’s ability to pay its operating expenses on time. Ο A company’s ability to pay interest even if sales decline. Ο A company’s profitability. Ο The relation between income and debt. Ο The relation between assets and liabilities.
The times Interest earned ratio reflects : A company’s
ability to pay interest even if sales declines
The time interest earned ratio = Earning before interest
and taxes / Interest
The time interest earned ratio is also known as”
Interest coverage ratio”.
Earning before interest and taxes are used in the numerator of
this ratio because the ability to pay interest is not affected by
the tax burden as interest on debt fund is deductible expense. this
ratio indicate the extent to which earning may fall without causing
any embarrassment to the firm regarding the payment of interest
charges. A high time interest earned ratio means that an enterprise
can easily meets its interest obligation even if earning before
interest and taxes suffer a considerable decline.A lower ratio
indicates excessive use of debt or inefficient operations.