What is the times interest earned ratio?

Accounting Dec 17, 2020

Expert Solution

The times interest earned ratio looks at how well a business can pay the cost of financing in interest from their operational income. The times interest earned ratio is found by dividing earnings before interest and taxes (EBIT) by the interest expense. The higher the ratio, the better a business is able to afford the costs of financing from operations. Let's try an example:

Account	Amount
Net Income	$50,000
Interest Expense	$10,000
Taxes	$5,000

The times interest earned ratio is 6.5 which we find by adding back in the taxes and interest expense to find EBIT (($50,000 + $10,000 + $5,000) / $10,000)

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