CFA Level IFinancial Statement AnalysisEasy
A company reports EBIT of $500,000 and interest expense of $100,000 for the year. What is the company's interest coverage ratio?
- A2.0x
- B0.2x
- C5.0x
- D6.0x
Show answer & explanationAnswer & explanation
Correct answer: C. 5.0x
Interest coverage ratio = EBIT / Interest expense = $500,000 / $100,000 = 5.0x, indicating the company earns five times its interest obligation.
Why the other options are wrong
- A. This does not match the correct division of the given figures.
- B. This inverts the ratio by dividing interest expense by EBIT.
- D. This would require EBIT of $600,000, which is not given.
Interest Coverage Ratio
A solvency ratio measuring a company's ability to meet interest payments from operating earnings, calculated as EBIT divided by interest expense.
- Interest coverage = EBIT / Interest expense
- Higher ratio indicates lower default risk on debt
- Also called times interest earned ratio
Memory trick: EBIT covers interest — divide earnings by the interest bill.