1. Money

What is the times interest earned ratio and what does it measure?

By

Question: What is the times interest earned ratio and what does it measure?
Answer:

The times interest earned ratio is another debt ratio that measures the long-term solvency of a business. It measures how well a company can meet its interest expense obligations.

For example, if a company owes interest on its long-term loans or mortgages, the times interest earned ratio can measure how easily the company can come up with the money to pay the interest on that debt.

The calculation of the times interest earned ratio is use the earnings before interest and taxes (EBIT) figure off the income statement and divide it by the interest expense (I) figure off the income statement.

Times interest earned = EBIT/I = Number of Times

The number of times indicates how well the firm meets its interest obligations. The higher the number, the better the firm can pay its interest expense on debt. If the TIE is less than 1.0, then the firm cannot meet its total interest expense on its debt.

Usually, if the debt to assets ratio is high, you will find that the times interest owned ratio is low since the business has a lot of debt.

©2014 About.com. All rights reserved.