which one of the following ratios is used to calculate the times-interest-earned ratio? course hero

Which one of the following ratios is used to calculate the times interest earned ratio?

Calculation. The times interest earned ratio is calculated by dividing the income before interest and taxes (EBIT) figure from the income statement by the interest expense (I) also from the income statement.

What ratio is used to measure the profit earned on each dollar invested in a firm?

The ROA ratio specifically reveals how much after-tax profit a company generates for every one dollar of assets it holds. It also measures the asset intensity of a business. The lower the profit per dollar of assets, the more asset-intensive a company is considered to be.

What does debt to equity ratio measure?

The debt-to-equity ratio measures your company's total debt relative to the amount originally invested by the owners and the earnings that have been retained over time.

Which of the following ratios can be used as a guide to a firm's ability to carry debt from an income perspective?

4The times interest earned ratio indicates a firm's long-term debt-paying ability from the incomestatement view. 4 .

What ratio is used to measure the profit earned on the available resources of a firm?

Gross profit margin is one of the most widely used profitability or margin ratios. Gross profit is the difference between revenue and the costs of production—called cost of goods sold (COGS).

What does the profit margin ratio measure?

Key Takeaways. Profit margin gauges the degree to which a company or a business activity makes money, essentially by dividing income by revenues. Expressed as a percentage, profit margin indicates how many cents of profit has been generated for each dollar of sale.

How do you calculate times interest earned?

The formula for TIE is calculated as earnings before interest and taxes divided by total interest payable on debt.

How is current ratio calculated?

To calculate the current ratio, you'll want to review your balance sheet and use the following formula.Current Ratio = Current Assets / Current Liabilities. ... $200,000 / $100,000 = 2. ... $100,000 / $200,000 = 0.5.

How is equity ratio calculated?

Equity ratio = Total equity / Total assets This is an easy number to calculate as long as you have your numbers handy from your balance sheet.

Which of the following ratios would be least useful in determining a company's ability to pay its expenses and liabilities?

Answer (c) Price-earnings ratio is the correct answer The price earning ratio is calculated as market price per share divided earning per share. So there is no effect on the company's ability to pay its expenses and liabilities.

What do you mean by liquidity ratio?

Liquidity ratios measure a company's ability to pay debt obligations and its margin of safety through the calculation of metrics including the current ratio, quick ratio, and operating cash flow ratio.

How is liquidity ratio calculated?

Types of Liquidity RatiosCurrent Ratio = Current Assets / Current Liabilities.Quick Ratio = (Cash + Accounts Receivables + Marketable Securities) / Current Liabilities.Cash Ratio = (Cash + Marketable Securities) / Current Liabilities.

Which of the following is the profitability ratio?

Earnings per share or EPS is a profitability ratio that measures the extent to which a company earns profit. It is calculated by dividing the net profit earned by outstanding shares. Having higher EPS translates into more profitability for the company.

What is the formula for the asset turnover ratio?

Asset Turnover Ratio = Net Sales / Average Total Assets It is the gross sales from a specific period less returns, allowances, or discounts taken by customers.

What are the most common financial ratios being used by investment analysts to measure the company's profitability liquidity solvency?

In general, there are four categories of ratio analysis: profitability, liquidity, solvency, and valuation. Common ratios include the price-to-earnings (P/E) ratio, net profit margin, and debt-to-equity (D/E).

What type of ratios measure the degree to which a firm relies on borrowed funds in its operations?

Two key ratios are: - Current ratio and acid test ratio • The information needed for computing these is found on the firm's balance sheet . Leverage ratios measure the degree to which a firm relies on borrowed funds in its operations.

Why do Harry's Bagels calculate times interest earned ratio?

Harry’s Bagels wants to calculate its times interest earned ratio in order to get a better idea of its debt repayment ability. Below are snippets from the business’ income statements:

What is EBIT in accounting?

Earnings Before Interest & Taxes (EBIT) – represents profit that the business has realized, without factoring in interest or tax payments. Interest Expense – represents the periodic debt payments that a company is legally obligated to make to its creditors. Generally speaking, the higher the TIE ratio, the better.

What is the purpose of a ties?

The TIE’s main purpose is to help quantify a company’s probability of default. This, in turn, helps determine relevant debt parameters such as the appropriate interest rate to be charged or the amount of debt. Debt Capacity Debt capacity refers to the total amount of debt a business can incur and repay according to the terms of the debt agreement.

What is the TIE ratio?

The times interest earned (TIE) ratio is a measure of a company's ability to meet its debt obligations based on its current income. The formula for a company's TIE number is earnings before interest and taxes (EBIT) divided by the total interest payable on bonds and other debt.

How to calculate TIE?

The formula for TIE is calculated as earnings before interest and taxes divided by total interest payable on debt.

What does a company's tie number mean?

A company's TIE indicates its ability to pay its debts. A better TIE number means a company has enough cash after paying its debts to continue to invest in the business. The formula for TIE is calculated as earnings before interest and taxes divided by total interest payable on debt.

Is a company that generates consistent earnings a credit risk?

If a lender sees a history of generating consistent earnings, the firm will be considered a better credit risk. Utility companies, for example, generate consistent earnings.

What percentage of net sales is represented in income statement?

D. In a horizontal analysis of the income statement, net sales is represented by 100 percent.

How to find average days to sell inventory?

True. T or F. Average days to sell inventory can be determined by dividing 365 by the inventory turnover ratio.

What is the Times Interest Earned Ratio?

The Times Interest Earned (TIE) Ratio measures a company’s ability to service its interest expense obligations based on its current operating income.

What is the resulting ratio of interest expense?

The resulting ratio shows the number of times that a company could pay off its interest expense using its operating income. Alternatively, other variations of the TIE ratio can use EBITDA as opposed to EBIT in the numerator.

What does a high TIE ratio mean?

If a company has a high TIE ratio, this signifies its creditworthiness as a borrower and the capacity to withstand underperformance due to the ample cushion (to satisfy its debt obligations) provided by its cash flows.

What is the TIe ratio for company A?

See below for the completed output for both companies. We can see the TIE ratio for Company A increases from 4.0x to 6.0x by the end of Year 5. In contrast, for Company B, the TIE ratio declines from 3.2x to 0.6x in the same time horizon.

What is the minimum TIE ratio?

While there aren’t necessarily strict parameters that apply to all companies, a TIE ratio above 2.0x is considered to be the minimum acceptable range, with 3.0x+ being preferred.

What is times interest earned?

Times interest earned (TIE) is a ratio between a company's income and interest expense that measures interest on debt obligations and the company's ability to pay them with its current earnings. TIE uses this formula:

Why is times interest earned important?

Times interest earned is an important metric for businesses and organizations to measure. This financial ratio allows creditors , lenders and investors to evaluate the financial strength of a company . This metric can also be a valuable tool for researching viable companies whose stocks you want to invest in. In this article, we'll explore what the times interest earned ratio is, how to calculate times interest earned and what this financial information means with several helpful examples.

How to calculate EBIT of a cell provider?

The financial planner first calculates the cell provider's EBIT by subtracting the operating expenses and COGS from the company's net income:

What does a tie ratio mean?

If a company's TIE ratio is a higher number, it indicates the company can cover the expenses it accrues in debts and debt interest. Lenders and investors regard a TIE ratio greater than 2.5 as being an acceptable credit risk. A TIE ratio of 2.5 or above also shows that a company is more likely to pay off its debts consistently over the long-term.

What does a TIE ratio of less than 2.5 mean?

When a company has a TIE ratio of less than 2.5, it suggests to investors that the company is financially unstable and at higher risk for default or bankruptcy. For instance, if a company has a times interest earned ratio of 3.75, this means that the company can meet its total interest payments 3.75 times over, or that its business income is 3.75 times higher than the interest expense it owes.

How to find total interest expense?

Find the total interest expense by multiplying the total amount in debt a company has by the average interest rate on its debts. For example, if a company has $135,000 in total debt liability and the average interest rate across all of its debt liability is 3%, multiply these two values together to get the total interest expense. Once you have both EBIT and interest expense values, you can use the formula to calculate times interest earned.

Why do companies have higher borrowing rates?

This means that creditors are more likely to risk lending to a company with consistent earnings because its history shows it generates enough consistent earnings to cover its long-term debt obligations.