Halverson's times interest earned ratio was 2.98 in 2016, 2.79 in 2015, and 2.31 in 2014. 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

The times interest earned ratio measures a company's ability to meet its interest payments using its earnings. A higher ratio indicates that the company has more earnings available to cover its interest payments, while a lower ratio indicates that the company may struggle to make its interest payments. The increasing trend in Halverson's times interest earned ratio, from 2.31 in 2014 to 2.98 in 2016, suggests that the company's earnings have been increasing relative to its interest payments, which in turn suggests that the levels of debt on which interest is incurred have been decreasing. Therefore, option A is possibly correct. The other options are not supported by the information given in the question.

Halverson's Times Interest Earned Ratio Was 2