Among the two most common approaches to computing the interest coverage ratio, what is in the numerator for the approach that is considered to be the less conservative way to measure solvency?

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12-09-2022
Social Studies

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Among the two most common approaches to computing the interest coverage ratio, what is in the numerator for the approach that is considered to be the less conservative way to measure solvency?

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aryanagarwal466 aryanagarwal466 · Answer 1 · 2022-09-14T20:03:14+02:00

Earnings before interest and taxes (EBIT) is in the numerator for the approach that is considered to be the less conservative way to measure solvency.

EBIT is a commonly used metric to assess an organization's operating profitability. EBIT, as its name implies, is net income before the impact of taxes and debt interest. Despite not being directly produced by the company's primary business operations, both of these charges are actual cash outlays. EBIT reveals the true profitability of the company by eliminating taxes and interest.

You may find the data needed to compute EBIT on your income statement. It is a technique to see your company's costs and income over a specific period of time, often three months, and is also known as a profit and loss statement. Spreadsheets may be used to track such data, but as your firm develops and evolves, doing so becomes more time consuming, incorrect, and challenging.

Learn more about Earnings before interest and taxes (EBIT), here

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