Multiple Choice
The times interest earned (TIE) ratio is a measure of long-term:
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14. Financial Statement Analysis
Ratios: Times Interest Earned (TIE)
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Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
The Times Interest Earned (TIE) ratio is a measure of a company's long-term:
A
ability to meet interest obligations
B
liquidity position
C
profitability from operations
D
efficiency in asset utilization
Verified step by step guidance1
Understand the concept of Times Interest Earned (TIE) ratio: It is a financial metric used to evaluate a company's ability to meet its interest obligations on debt using its operating income.
Recognize the formula for TIE ratio: \( \text{TIE Ratio} = \frac{\text{Earnings Before Interest and Taxes (EBIT)}}{\text{Interest Expense}} \). This formula highlights the relationship between operating income and interest obligations.
Analyze the purpose of the TIE ratio: It specifically measures the company's long-term ability to meet interest obligations, rather than liquidity, profitability, or asset utilization.
Differentiate the TIE ratio from other financial metrics: Liquidity ratios assess short-term financial health, profitability ratios measure operational success, and efficiency ratios evaluate asset utilization. TIE focuses solely on interest coverage.
Conclude that the correct answer is 'ability to meet interest obligations,' as this aligns with the definition and purpose of the TIE ratio.
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