What financial ratio measures a firm’s capacity to cover annual debt interest payments using its operating profit (EBIT)?
ADebt-to-Equity Ratio
BTimes Interest Earned (Interest Coverage)
CDebt Ratio
DFixed Charge Coverage
Explanation
• Times Interest Earned (TIE), or Interest Coverage Ratio, formula: $text{TIE} = frac{text{EBIT}}{text{Total Interest Expense}}$.
• It evaluates the firm’s safety margin in meeting interest obligations on outstanding debt.
• Higher coverage ratios reflect lower default risk for debtholders and lenders.
Exam Relevance
- Topic: Financial Statement Analysis
- Subtopic: Solvency Ratios
No Comments