The ratio that indicates if a borrowing company will be able to meet its required interest payments is the
Question
The ratio that indicates if a borrowing company will be able to meet its required interest payments is the
Solution
The ratio that indicates if a borrowing company will be able to meet its required interest payments is the "Interest Coverage Ratio" or "Times Interest Earned Ratio".
Here are the steps to calculate it:
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Identify the Earnings Before Interest and Taxes (EBIT) from the company's income statement. This is the company's income before taking into account interest and taxes.
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Identify the interest expense, which is also found on the income statement. This is the amount of interest the company has to pay on its debt.
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Divide the EBIT by the interest expense. The formula is: Interest Coverage Ratio = EBIT / Interest Expense.
The resulting number is the Interest Coverage Ratio. If the ratio is less than 1, it means the company is not generating enough earnings to cover its interest expenses and could be at risk of default. If the ratio is 1 or more, it means the company is able to cover its interest expenses with its earnings. The higher the ratio, the more able the company is to cover its debt.
Similar Questions
Debt ratio is the ratio of
ratios measure the degree to which a firm relies on borrowed funds in its operations.
if a company borrows $100,000 at a 10% stated interest rate and is required to maintain a 15% compensating balance ($15,000), the effective interest rate would be:
The times interest earned (also called interest coverage) ratio may be interpreted as follows:Group of answer choicesThe higher the ratio result the higher an entity’s ability to meet its interest payments.The higher the ratio result the lower an entity’s ability to meet its interest and debt repayments.The lower the ratio result the higher an entity’s ability to meet its interest payments.The higher the ratio result the higher an entity’s ability to meet its interest and debt repayments.
The debt to equity ratio indicates:The net worth of the companyThe proportion of the company financed by lenders versus ownersA company's working capital funding gapThe liquidity of the company
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