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.
