Times Interest Earned Ratio
The Times Interest Earned Ratio is the final leverage ratio we look at and is slightly different to the previous two. It is purely a risk measure and the calculation tells us how many times over a company’s earnings, specifically its earnings before interest and tax (EBIT), can be used to meet its interest payments.
While the debt ratio is a risk measure telling us the level of business debt, the times interest earned ratio is a risk measure telling us about debt serviceability. It explains how easily (or not) a business can service its debts. The higher the ratio, the more times over its EBIT can meet its interest expense, the easier it can service its debt and the safer a business appears to be.
The ratio represents how many times over a company’s EBIT (Income Before Tax plus Interest Expense) covers its interest expense. A result of 4.2 means there is 4.2 times EBIT than there is interest expense.
Times Interest Earned Ratio Formula
(Income before Tax + Interest Expense) / Interest Expense
Times Interest Earned Ratio Calculator
The calculator asks for:
Income Before Tax, which is found in the Income Statement.
Interest Expense, which is also found in the Income Statement.
Want to know more about the Ratios used in the S&P500 stock calculations, including all formulas?
Check out their individual ratio pages via the main menu for Descriptions, Calculators & Formulas
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