The coverage ratios are similar to liquidity ratios in that they describe the quantity of funds available to “cover” certain expenses. We will examine two very similar ratios that describe the firm’s ability to meet its interest payment obligations. In both cases, higher ratios are desirable to a degree. However, if they are too high, it may indicate that the firm is under-utilizing its debt capacity, and therefore not maximizing shareholder wealth. The Times Interest Earned Ratio The times [...]
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