Arch Coal, Inc. is a major coal mining company in the United States. Condensed i

Question

Arch Coal, Inc. is a major coal mining company in the United States. Condensed income statement information for three recent years follows (in millions) Year 3 Year 2 Year 1 2 Revenues 3 Costs and expenses 4 Loss from operations 5Interest expense (net) 6 Loss before income taxes $2,93700 3,087.00 (150.00) 383.00 $(533.00) $3,014.00 ,677.00 $(663.00) 375.00 $(1,038.00) $3,768.00 4,525.00 $(757.00) 312.00 $(1,069.00) a. Compute the times interest earned ratio for the three years. (Round to one decimal place.) b. How would you interpret a negative ratio? c. Is the trend improving or deteriorating?

Explanation / Answer

a.) Times earned interest ratio is also known as interest coverage ratio= EBIT/Interest payment required

Year 1=-757/312=-2.426

Year 2=-663/375=-1.768

Year 3=-150/383=-0.391

b.) Negative ratio indicates the creditors claims for interest are in jeopardy, especially if losses persist.

As the earnings are negative, the firm does not have sufficient money earned from business to pay of creditors interest charges

c.) In this case, the ratio is becoming less negative, thereby indicating an improving scenario.

In general, higher the ratio, the better is the company's financial position

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