The lower the value of the times interest earned ratio, the higher is the proportion of the firm's earnings before interest and taxes (EBIT) compared to its interest expense.

Question

BlackTom AI · Accepted Answer

The question concerns the interpretation of the times interest earned (TIE) ratio, where TIE is calculated as EBIT divided by interest expense.
Option 1: True — This statement claims that a lower TIE means a higher proportion of EBIT to interest expense. In reality, a lower TIE indicates the opposite: EBIT is smaller relative to interest expense, so the burden on earnings before interest and taxes is greater relative to interest, meaning a lower cushion for interest payments.
Option 2: False — This accurately reflects the relationship: as the TIE ratio decreases, EBIT relative to interest expense decreases as well, implying a smaller margin to cover interest costs rather than a higher proportion. A higher TIE ratio signals stronger coverage of interest by EBIT, while a lower ratio signals weaker coverage and a tighter mix between earnings and interest obligations.

The lower the value of the times interest earned ratio, the higher is the proportion of the firm's earnings before interest and taxes (EBIT) compared to its interest expense.

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