Time interest earned ratio also called interest cover ratio, is a leverage ratio that assesses the level of profits as compared to interest payments on long-term debt. The interest payment increases when the level of debt increases, so ultimately profits are compromised. The time interest earned ratio measures how much shock of higher interest payments a company’s profits can absorb.
The formula for times interest earned ratio is
Times interest earned ratio = EBIT / Interest cost
The higher the time's interest earned ratio is the safer a company’s shareholders will feel. Ideally, the time interest earned ratio should be at least 2.0.
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