- CFA Exams
- CFA Level I Exam
- Topic 4. Financial Statement Analysis
- Learning Module 11. Financial Analysis Techniques
- Subject 4. Solvency Ratios
CFA Practice Question
Which of the following is the formula for computing the times-interest-earned ratio?
B. Interest expense divided by operating profit
C. Operating profit divided by interest expense
A. Net income divided by interest expense
B. Interest expense divided by operating profit
C. Operating profit divided by interest expense
Correct Answer: C
The times-interest-earned ratio is equal to operating profit divided by interest expense. This ratio shows how many times a company satisfies its fixed interest payments from operating earnings. The more times a company can cover its annual interest expense from operating earnings, the lower the risk the company will default on its debt payments.
User Contributed Comments 5
| User | Comment |
|---|---|
| kalps | I thought it was earning before interest and tax which would be operating profit + interest |
| eavotri | Operating profit is EBIT |
| dlo1 | Operating profit = Net Sales - COGS - Operating expenses. This excludes interest expense and tax. |
| gullan | the times-interest-earned ratio is also called interest coverage. |
| PaulC | times-interest-earned ratio |