What does the Times Interest Earned ratio measure?

The Times Interest Earned ratio measures how well a company can cover its interest expenses with its operating income. This ratio is calculated by dividing earnings before interest and taxes (EBIT) by interest expense. A higher ratio indicates that a company has a greater ability to meet its interest obligations, which is an important indicator of financial health and stability. Investors and creditors often look at this ratio to assess the risk associated with a company's capital structure.

In this context, choice B clearly reflects the purpose of the ratio, emphasizing its focus on the company's ability to pay interest based on its income. This measurement provides insight into the company's risk of default, with higher ratios being favorable as they suggest a lower risk of financial distress in meeting interest payments.