Question

I anticipate that I will be able to increase my gross profit margin, operating profit margin and net profit margin in the upcoming year. assuming that my sales also increase modestly, that my level of debt does not change and that I do not enter into any new operating or capital leases, what will likely happen to both my TIE and FCC ratios?

a) fcc will stay the same but TIE will increase

b) both the TIE and the FCC will increase

c) TIE will stay the same but my FCC will decrease

d) both the TIE and the FCC will decrease

e) none of the above

Answer 1

b) both TIE and FCC will increase

Explanation:

Following are the formula for TIE and FCC:

TIE (Times Interest Earned) = Earnings Before Interest and Tax / Total Interest Expenses

FCC (Fixed Charge Coverage Ratio) = (EBIT + Fixed Charges Before Tax) / Fixed Charges Before Tax + Interest

From the above formulas it can be observed that both ratios considers EBIT and if there is no Fixed Charges other than interest then both ratio would have same value. In the given question, there is increase in gross profit margin, operating profit margin and net profit margin which indicates that there will be increase in EBIT. On the other hand there is no increase in debt and fixed charges. Therefore both the TIE and the FCC will increase.