Times Interest Earned Ratio

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Times Interest Earned Ratio

Times Interest Earned Ratio =

EBIT

Interest Expense

AKA: interest coverage ratio

INTERPRETATION

Measures the amount of income that can be used to cover interest expenses in the future. This ratio shows how often a company’s earnings can cover the fixed-interest payments on its long-term debt.

Note: expanded calculation

Divide income before interest and income taxes by the interest expense.

EBIT is earnings before interest and taxes and is sometimes called Operating income.

EXAMPLE

M&M’s income statement shows $500,000 of income before interest expense and income taxes. And an overall interest expense for the year of $50,000.

Times Interest Earned Ratio = $500,000 / $50,000 = 10

M&M’s income is ten times greater than its annual interest expense.

BENCHMARK: HA, PG, ROT

The larger ratios are more favorable than smaller ones because they indicate that the company can afford the interest expense.

Generally, a company with a rate below 2.5 is considered overextended.

Times Interest Earned Ratio:

ABBREVIATION KEY:

ROT: Rule of thumb
HA: Historical Average (organization’s historical average)
PG: Peer Group average
EB: Economic Benchmark

DISCLAIMER: The interactive calculators on this site are self-help tools intended to help you visualize and explore your financial information. They are not intended to replace the advice of a qualified professional. Because each business is different, we can not guarantee accuracy.