Certified Management Accountant Practice Exam 2026 - Free CMA Practice Questions and Study Guide

The Times Interest Earned Ratio is a critical financial metric that measures a company's ability to meet its interest obligations on debt. It is calculated by dividing a company's earnings before interest and taxes (EBIT) by its interest expenses. This ratio provides insight into how well a company can cover its interest obligations, which is crucial for assessing financial stability and the risk of default.

A higher Times Interest Earned Ratio indicates a greater ability to pay interest, suggesting that the company is in a solid position to meet its debt obligations. Conversely, a lower ratio may signal potential difficulties, which could lead to financial distress if interest payments cannot be comfortably met.

Understanding this metric is vital for stakeholders, including creditors and investors, as it highlights the level of risk associated with the company's financial structure. In summary, this ratio directly aligns with the question's focus on the ability to cover interest expenses, making it the appropriate choice.