Question

Park's competitor's times interest earned is 4.0. Is Park in a better or worse position than its competitor to make interest payments if the economy turns bad?

Answer 1

Answer:

In the first part of the question we calculate that Park's times interest earned ratio is $1885000 / $145000 = 13 times

if Park's competitor has a times earned ratio of 4, it means that Park is in a much better financial position to make interest payments.

The times interest earned ratio measures how many times a company can pay their interest expense with their current EBIT or operating revenue. The higher the ratio, the better since it shows a healthier financial position.

Neither park nor its competitor are currently at risk of not paying their debt, but what happens if something goes wrong and sales decrease or costs increase? Or everyone has to stay home for a while? Park can handle a bad economy better than its competitors.