The Time Interest Earned Ratio, or Interest Coverage Ratio, is a financial metric that assesses a company’s ability to cover its interest expenses with its earnings before interest and taxes (EBIT), indicating its capacity to meet debt obligations.
Primary Implication
Times Interest Earned is an insignificant ratio for small businesses. There are several other reasons why a lender will refuse to loan you money before they would begin to worry about your ability to meet your interest payments as they come due.
Overview
The Time Interest Earned Ratio or Interest Coverage Ratio is a Liquidity Ratio that measures the amount of income that can be used to cover interest expenses and make debt service payments in the future. Its calculation shows how many times a company could pay interest using its before-tax income.
The formula for calculating the Time Interest Earned Ratio is the following:
EBIT / Interest Expense
A ratio of 4 means that a company makes enough income to pay for its total interest expense four times over.
Above 1: confirms that the company can afford to pay its interest payments as they come due.
Less than 1: indicates an existing credit risk.
