The times interest earned ratio reflects:


The times interest earned ratio reflects: Multiple Choice Ο A companys ability to pay its operating expenses on time. Ο A co

Answer

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.

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