What is Times interest earned ratio?
In short
The times interest earned ratio is earnings before interest and taxes divided by interest expense. It shows how comfortably operating earnings cover interest costs.
Key takeaways
- Add interest and income tax expense back to net income to get the numerator.
- A falling ratio, especially with rising debt, signals growing solvency risk.
- Lenders often use it as a covenant.
Example
Net income $300,000, tax $100,000 and interest $50,000 give earnings before interest and taxes of $450,000 and a ratio of 9.
Where it's tested
BAR: Financial Statement Analysis — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A company's times interest earned ratio declines sharply while its debt-to-equity ratio rises. This most likely indicates: