The Times Interest Earned Ratio is calculated by dividing EBIT by interest expenses for a specific period. This ratio helps assess a company’s financial health by indicating how many times it can pay its interest obligations using its earnings. A higher ratio suggests a stronger capacity to meet interest payments, while a lower ratio raises concerns about potential financial difficulties. Investors and creditors often rely on this metric to evaluate the risk associated with lending to or investing in a company, as it reflects the firm’s ability to manage its debt.
Times Interest Earned Ratio Example
For example, if a company has an EBIT of $600,000 and interest expenses of $150,000, the Times Interest Earned Ratio would be 4. This means the company can cover its interest payments four times with its earnings, indicating a solid financial position.