Question

it's about long term debt paying ability ratios: From these ratios ( Times interest earned ratio...

it's about long term debt paying ability ratios:
From these ratios ( Times interest earned ratio - Fixed charge coverage ratio - debt raio) , which would you choose to use? why?

Homework Answers

Answer #1

Ans:

To check the long term debt paying ability ratios, Times interest earned ratio to be checked because:

Times interest earned ratio = Earnings Before Interest and Taxes / Total Interest Expense

When EBIT is sufficient enough to realise that the company will have sufficient profits by the time the debts are due, so that the payments of the debts can be done easily. It will help in checking the company's ability to pay debts in future. If the Times interest earned ratio is less than one than it is difficult for company to pay their debts on time.

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