CFA Practice Question

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CFA Practice Question

Which of the following is the formula for computing the times-interest-earned ratio?

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
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