Why is the times interest earned ratio considered important? ANswer in 100-150 words

Expert Solution

Times Interest Earned ratio is used to identify the company ability to service its Interest Payment for the debt. This also called as Interest Coverage ratio which shows how well company can cover its Interest Payments. If the ratio is higher , the company is more capable to pay its interest on its debt.

Formula= Earnings before Interest and taxes/ Total Interest.

This ratio is considered important as it helps to measure the financial capability of the company. If the Companies EBIT is significantly higher than its interest commitments,then the ratio will be high.

Higher ratio will also means the companies paying too much debt with earnings which they would have used for other opportunites to get more return.

Low ratio is considered that company is unable to meet its interest obligations and failure to meet the same may result into bankruptcy.

Banks and other lenders uses this ratio to determine the company's debt capacity which helps to take their decision to lend or not.

ekkarill92 answered 1 year ago

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