Times interest earned ratio

Why is it possible to talk of a “rule-of-thumb” number, such as 2.0, for the current ratio, but not have a comparable rule-of-thumb number for the times interest earned ratio?

Some ratios describe conditions that are common to many organizations and do not depend very much on the nature of the company. For example, all companies require adequate liquidity. A company with a current ratio of 2.0 most likely has a good degree of liquiditylnot so little that it will have trouble paying its obligations and not so much that it has underused current assets. Other ratios describe conditions that vary significantly from company to company due to the industries they are in, the technologies they use, or the markets they serve. For example, a company’s stability of cash flows is an important determinant of an adequate times interest earned ratio. Stable companies can afford a low value of the ratio, while a much higher value would be appropriate for companies with highly variable cash flows.

Be the first to comment on "Times interest earned ratio"

Leave a comment

Your email address will not be published.


This site uses Akismet to reduce spam. Learn how your comment data is processed.