Halverson's times interest earned ratio was 2.98 in 2019,2.79 in 2018,and 2.31 in 2017.Which of the following statements about the ratio is correct?
A)The increasing ratio indicates decreasing levels of debt on which interest is incurred.
B)The increasing ratio indicates the strategy of pursuing growth by investment in other companies,which has increased debt,but Halverson's profits have not yet increased from those investments.
C)The increasing ratio implies increased long-term debt financing.
D)The increasing ratio would be considered by creditors to be an indicator of higher risk.

Question

Quizplus · Accepted Answer

The times interest earned ratio measures a company's ability to meet its interest payments on debt. A higher ratio indicates that the company is generating more earnings to cover its interest expenses, which means it has less debt relative to its earnings. Therefore, choice A is correct as an increasing ratio would indicate decreasing levels of debt on which interest is incurred. Choices B and C are not supported by the given information and are therefore incorrect. Choice D is incorrect because a higher times interest earned ratio suggests that a company is less risky as it has a greater ability to pay its interest expenses.

Halverson's Times Interest Earned Ratio Was 2