Practice question · Multiple choice
A firm reports rising profit and an interest cover falling toward 1. What does that combination indicate?
Hints
- Ask what interest cover is a ratio OF.
- Can a profitable firm still fail to make a payment?
Show the answer
D. That debt-service obligations grow faster than operating profit
Why
Cover below 1 means operating profit no longer pays the interest. Profitable firms fail on liquidity and solvency all the time, which is why the ratios are read together rather than separately.
Practise Financial Statement Analysis
The app has 6 more questions on this lesson, and keeps your place in the course. Business I is free to start.
More questions on Financial Statement Analysis
- EBIT 450, interest expense 90. Estimate the interest cover ratio.
- Liquidity, solvency, or profitability ratio?
- Match each DuPont component to its formula.
- A firm's ROE rises from 12% to 20% while its ROA is unchanged. What has management actually done?
- A firm's ROE is 18% but its ROA is only 6%. The DuPont leverage multiplier must be:
- Which benchmarks make a ratio meaningful?