What is Times Interest Earned?
Times Interest Earned, also known as the interest coverage ratio, is a solvency ratio that compares the operating profit with the interest expense of the current reporting period.
How to Calculate Times Interest Earned
The Times Interest Earned ratio is calculated by dividing operating profit by interest expense.
All items are reported on a company’s income statement.
How to Interpret Times Interest Earned
The Times Interest Earned ratio shows a company’s ability to cover its debt obligations for the reporting period with its earnings before interest and income tax expense.
- High Times Interest Earned ratio: the company carries moderate debt and is able to cover its debt obligations.
- Low Times Interest Earned ratio: the company carries excessive debt, may struggle in the future and might need to get additional financing, or potentially face bankruptcy.
Companies with a high times interest earned ratio are more likely to be the ones with a durable competitive advantage.
However, this ratio varies greatly from industry to industry, and when assessing a company, the Times Interest Earned ratio should be compared to competitors in the same industry.