The statement is True. A corporation is a lesser risk borrower if the times interest earned ratio is high.
What Is Times Interest Earned Ratio?
- The times interest earned ratio measures a company's solvency by determining if it generates enough revenue to cover its debt. It specifically contrasts the revenue generated by a business before taxes and interest with the interest costs associated with its debt obligations.
- The ability of a business to make debt payments on time is gauged by the interest coverage ratio or times interest collected. EBIT or EBITDA divided by the total interest expense might be used to determine it.
- A lower times interest earned ratio indicates that there are fewer earnings available to cover interest payments, making the company more susceptible to increases in interest rates and the inability to repay its outstanding debts.
- Divide income by the total amount of interest due on bonds or other types of debt to arrive at this ratio. You'll see a number that ranks the company's capacity to pay interest charges with pre-tax earnings after performing this calculation.
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