I need help with this question asap can u please help me in

I need help with this question asap, can u please help me in solving this question.

to? Chutes & Co. has interest expense of $1.74 million and an operating margin of 10.9% on total sales of $30 6 million. What is Chutes interest coverage The interest coverage ratio is[] times. (Round to one decimal place.)

Solution

Interest coverage ratio is used to check how easily any company can pay interest expenses on it’s outstanding debt.

Interest coverage ratio helps to understand company’s ability to pay interest payment obligation. Any investor who would want to invest in company would like that company should be able to pay off their expenses including outstanding interest on loan.

In the given example we are given below details:

Interest expense of 1.74

Operating margin of 10.9% on total assets of 30.6

We need to calculate Interest Coverage Ratio of the company.

Formula: Interest Coverage Ratio - Earnings before interest and taxes / Interest expenses

Here, Earnings before interest and taxes i.e. EBIT, means company’s earnings before interest and tax expenses. Here we are given operating margin of 10.9% on total assets of 30.6 and formula for operating margin is given below:

Formula: Operating Margin - Operating income / Sales Revenue

Therefore we should take Earnings before interest and taxes i.e. EBIT as 30.6 * 10.9% --> 3.34

Interest Coverage Ratio - Earnings before interest and taxes / Interest expenses

Interest Coverage Ratio of a company is - 3.34 / 1.74 ---> 1.92

Note: Higher Interest Coverage Ratio indicates a company is in better condition to pay off interest obligation out of it’s operating income.