Definition of Times Interest Earned
Time interest earned is a ratio that assesses the business’s ability to pay interest cost on interest-bearing debt out of its operating profits before interest and taxes also called EBIT. The time interest earned ratio is a very important ratio from an audit perspective because it determines the liquidity of the company and assesses the level of financial leverage.
The time interest earned ratio is calculated as follows.
If the time interest earned is less than 2.0 it is alarming for a company and its shareholders because there will be not much left after payment of interest and taxes for distribution of profits after taxes.
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