Halverson's times interest earned ratio was 2.98 in 2014, 2.79 in 2013, and 2.31 in 2012. Which of the following statements about the ratio is possibly 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

A higher times interest earned ratio indicates that a company is generating more earnings relative to its interest expense, which suggests that the company is better able to meet its interest obligations. Therefore, an increasing ratio could indicate decreasing levels of debt on which interest is incurred, as Halverson's profits are increasing relative to its interest expense. Option B is incorrect because an increasing ratio would not necessarily be indicative of pursuing growth by investment in other companies. Option C is incorrect because the question does not provide any information about increased long-term debt financing. Option D is incorrect because a higher times interest earned ratio would be considered by creditors to be an indicator of lower risk, not higher risk.

Halverson's Times Interest Earned Ratio Was 2