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Bank Promotion Exams |
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Times Interest Earned Ratio or Interest Coverage Ratio The times interest earned ratio, sometimes called the interest coverage ratio, is a coverage ratio that measures the proportionate amount of income that can be used to cover interest expenses in the future. In some respects the times interest ratio is considered a solvency ratio because it measures a firm's ability to make interest and debt service payments. Since these interest payments are usually made on a long-term basis, they are often treated as an ongoing, fixed expense. As with most fixed expenses, if the company can't make the payments, it could go bankrupt and cease to exist. Thus, this ratio could be considered a solvency ratio. The times interest earned ratio is calculated by dividing income before interest and income taxes by the interest expense. Formula Times Interest Earned Ratio or Interest Coverage Ratio = Income before interest and taxes / Interest Expense Example 2: Ravi's income statement shows that he made 5,00,000 of income before interest expense and income taxes. Ravi's overall interest expense for the year was only 50,000. Ravi's time interest earned ratio would be ...... Times Interest Earned Ratio or Interest Coverage Ratio = Income before interest and taxes / Interest Expense .................................
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