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One Criticism of the Interest and Fixed Charges Coverage Ratios

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Essay

One criticism of the interest and fixed charges coverage ratios as measures of long-term solvency risk is that they use earnings rather than cash flows in the numerator.Detail how the interest coverage ratio and fixed charges coverage ratio are calculated.In addition,discuss why using earnings in the numerator is a problem and what method could be used to alleviate this problem.


Definitions:

Product Price

The amount of money required to purchase a specific product or service, often influenced by production costs, market demand, and competition.

Lower Costs

The process or strategy of reducing expenses incurred in operations, production, or providing services to increase profitability.

Competitive Advantage

A unique attribute or position that allows a company to outperform its competitors.

Customer's Tastes

Customer's tastes refer to the preferences, inclinations, and discretionary choices of consumers that influence their purchasing behavior and affect how businesses market and sell products or services.

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