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Times Interest Earned Ratio

The Times Interest Earned Ratio, also known as the Interest Coverage Ratio (ICR), is a financial metric used to measure a company's ability to pay its interest expenses on outstanding debts. It represents the number of times the company can cover its annual interest payments using its earnings before interest and taxes (EBIT). This ratio provides investors and creditors with an indication of the company's creditworthiness, allowing them to assess its capacity to meet debt obligations.

Understanding Times Interest Earned Ratio

What is Times Interest Earned Ratio?​

The Times Interest Earned Ratio is calculated by dividing a company's Earnings Before Interest and Taxes (EBIT) by its interest expenses. The resulting value indicates how many times the company can pay its annual interest charges using its pre-tax earnings.

Example Calculation​

EBIT: $1,000,000 Interest Expenses: $100,000

Times Interest Earned Ratio = EBIT ÷ Interest Expenses = $1,000,000 ÷ $100,000 = 10 times

Interpretation of Times Interest Earned Ratio​

  • A higher ratio value (typically above 3-4) indicates a company's strong ability to cover interest expenses, suggesting a lower risk of default.
  • A lower ratio value (typically below 1.5) may indicate financial distress or a high risk of default.

Importance of Times Interest Earned Ratio​

Impact on Credit Decisions​

The Times Interest Earned Ratio plays a crucial role in credit decisions for investors, lenders, and other stakeholders. It provides an objective measure to evaluate a company's creditworthiness, helping them make informed investment or lending decisions.

Relationship with Other Ratios​

The Times Interest Earned Ratio is closely related to other financial ratios, such as the Debt-to-Equity Ratio (DER) and Return on Equity (ROE). Understanding these relationships can provide valuable insights into a company's overall financial health.