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SSC Audit Tax Finance P-II QUESTION #6163
Question 1
An analyst notices that a firm's 'Times-Interest-Earned' ratio has dropped from 6.0 to 2.5. What is the most likely implication?
  • The firm's liquidity has improved
  • The firm's ability to service debt from operating profits has weakened✔️
  • The firm has reduced its financial leverage
  • The firm's asset turnover has increased
Correct Answer Explanation
TIE = EBIT / Interest. A lower ratio indicates that operating profits cover interest charges fewer times, increasing default risk.