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July 30, 2008

What is the times interest earned ratio?

The times interest earned ratio is an Indicator of a company’s ability to meet the interest payments on its debt. The times interest earned calculation is a corporation’s income before interest and income tax expense, divided by interest expense.

To illustrate the times interest earned ratio, let’s assume that a corporation’s net income after tax was $500,000; its interest expense was $200,000; and its income tax expense was $300,000. Given these assumptions, the corporation’s income before interest and income tax expense is $1,000,000 (net income of $500,000 + interest expense of $200,000 + income tax expense of $300,000). Since the interest expense was $200,000, the corporation’s times interest earned is 5 ($1,000,000 divided by $200,000).

The higher the times interest earned ratio, the more likely it is that the corporation will be able to meet its interest payments.

The times interest earned ratio is also referred to as the interest coverage ratio.

Learn more about Financial Ratios.

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About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the author of the 2010 Master Accounting Download Package which has been praised for it's ability to simplify accounting in a way that anybody can understand.



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Comments

6 Responses to “What is the times interest earned ratio?”

  1. Michael F. Martin on July 31st, 2008 12:43 pm

    Congratulations on having what I believe is the best accounting blog on the Internet.

    I’ve been reading and enjoying your posts for a while. Could I ask for a few topics that are of interest?

    * Use of off-balance sheet special purpose vehicles? When is this okay under GAAP?

    * Just-in-time accounting and backflush costing. What are the main problems with implementing these in management accounting.

    In general, I’m interested in understanding why the balance sheets reported by public firms don’t seem to reflect the actual assets, liabilities, and equity of a firm on the date of the financial statement.

  2. Samuel on March 9th, 2009 3:25 pm

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  3. shivani on October 10th, 2009 10:36 pm

    One of the best accounting blogs that I have come accrross. Helped me top score in my exams. Thank you very much & hope to heve more informative content.

  4. Diaa on November 6th, 2009 6:00 am

    i have a question please

    on 1 November 20XX i have recieved one bill for my yearly land rent of 1 Milliion $ as Payable, and im planning to pay this amount as installments starting Jan 20×1 so on My November 30 what should be my accounting Entry

  5. v on January 20th, 2010 10:15 am

    times interest earned is 5 ??? does this mean for each 1 1dollar of intrest i have 5 ? what exactly does this d represents thanks ahead ?

  6. ana on March 10th, 2010 6:56 am

    Another queston!
    how to get the income tax expense give income tax rate of 35% , a profit of 900000 , interest expense of 100,000? in order for me to calculate times interest earned ratio!!

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