Sometimes called the coverage ratio, this ratio measures the risk that interest payments will not be made if earnings decrease. a. Number of days' sales in inventory b. Times interest earned ratio c. Ratio of fixed assets to long-term liabilities d. Ratio of liabilities to stockholders' equity

Question

Business

Lindsay Dyer

6 February, 06:40

Sometimes called the coverage ratio, this ratio measures the risk that interest payments will not be made if earnings decrease. a. Number of days' sales in inventory b. Times interest earned ratio c. Ratio of fixed assets to long-term liabilities d. Ratio of liabilities to stockholders' equity

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Answers (1)

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Larry Medina · Answer 1

The correct answer is letter "B": Times Interest Earned Ratio.

Explanation:

Times Interest Earned (TIE) ratio or the coverage ratio tests the capacity of a company to pay off its debts. TIE is calculated by dividing the company's earnings before interest and taxes by the interest that is payable on its debts. A low ratio means the company struggles to pay its debt, and if it fails to meet its obligations, it may face bankruptcy. A high ratio means that an organization can cover its expenses.