Answers the Question
Can we pay the interest owed with our earnings?
Calculator for Times Interest Earned Ratio
What Is the Times Interest Earned Ratio?
This is a measure of how well a firm can cover interest costs with its earnings. The larger the number, the more easily interest can be paid.
Also called interest coverage ratio.
Why Is it Important?
- Understanding how much of a firm's earnings is being used to pay off debt will inform analysts whether the business is sustainable, and whether there is money left over to pay for investment into increasing future earnings.
Formula(s) to Calculate Times Interest Earned Ratio
- TIMES INTEREST EARNED RATIO = EARNINGS BEFORE INTEREST AND TAXES / INTEREST EXPENSE
- Firms at the early stages of customer development or research and development will often have ratios that look quite poor. Even so, such firms may have long and healthy lives ahead of them.