True or False: The times-interest-earned ratio is calculated as EBIT divided by interest expense.

Question:- True or False: The times-interest-earned ratio is calculated as EBIT divided by interest expense.

Answer: True.

The times’ interest earned is another financial ratio that is used in assessing a company’s ability to pay for the interest on a particular debt from the operating income. This depends on the formula of EBIT/Interest expense, where the EBIT is the earnings before interest and taxes and the interest expense is the interest line on the company’s income statement of a given period.

A higher times-interest-earned ratio also gives the inside the fact that the firm is in a position to handle interest responsibility from operating income without a lot of struggle. Conversely, the low percentage means that the company can face some issues with regard to the servicing of the loans. This ratio is commonly used by lenders and creditors to assess the capacity of the organisation to pay the loan taken.