Investors use the times-interest-earned ratio to evaluate a company's ability to pay interest expense.

Question

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The times-interest-earned ratio (also known as the interest coverage ratio) is used to measure a company's ability to meet its interest payments on outstanding debt. It is calculated by dividing the company's earnings before interest and taxes (EBIT) by its interest expense. A higher ratio indicates that the company is more capable of servicing its debt and therefore less risky to investors.

Investors Use the Times-Interest-Earned Ratio to Evaluate a Company's Ability