Final answer:
The times-interest-earned ratio measures a company's ability to cover its interest payments with its earnings. It is expressed as a formula: Times-Interest-Earned Ratio = Earnings Before Interest and Taxes (EBIT) / Interest Expense.
Step-by-step explanation:
The times-interest-earned ratio measures a company's ability to cover its interest payments with its earnings. It indicates the company's ability to meet its debt obligations. It is expressed as a formula:
Times-Interest-Earned Ratio = Earnings Before Interest and Taxes (EBIT) / Interest Expense
The higher the ratio, the better, as it shows the company has more earnings available to cover its interest expenses. A ratio below 1 indicates that the company is unable to cover its interest payments.