Asked by Guillermo Orizaba on May 12, 2024
Verified
The risk of a company not being able to pay its liabilities increases sharply when times interest earned falls below 1.5 to 2.0 and remains at that level or lower for several time periods.
Times Interest Earned
A financial metric assessing a company's capacity to fulfill its debt responsibilities using its present earnings.
Liabilities
Financial obligations or debts of a business entity that are owed to third parties.
- Understand the impact of liabilities on a company’s financial health and risk assessment.
Verified Answer
JR
juliet rosasMay 16, 2024
Final Answer :
True
Explanation :
Times interest earned is a measure of a company's ability to cover its interest payments with its earnings. When this ratio falls below 1.5 to 2.0, it indicates that the company may not be generating enough income to meet its interest obligations. If this persists over several time periods, the risk of the company not being able to pay its liabilities (including interest) increases sharply.
Learning Objectives
- Understand the impact of liabilities on a company’s financial health and risk assessment.
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