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Foundations Of Financial Management
Found in: Page 74
Foundations Of Financial Management

Foundations Of Financial Management

Book edition 16th
Author(s) Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Pages 768 pages
ISBN 9781259277160

Short Answer

What advantage does the fixed charge coverage ratio offer over simply using times interest earned?

The fixed charges coverage ratio is computed to measure the company’s ability to meet all the fixed financial liabilities rather than just interest expenses.

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Step by Step Solution

Fixed-charge coverage ratio

It is considered as a debt utilization ratio. It can be computed as follows:

It is computed to know about the creditworthiness of the company. It shows the ability of the company to repay its debt with the available funds.

Interest earned ratio

It is computed to know the company’s ability to meet the debt liability on the basis of the current income. Hence, it is advantageous to use a fixed charge coverage ratio as it shows the company’s ability to meet not only the interest expenses but other fixed charges also.

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