# Calculate and Interpret the Times Interest Earned Ratio

The *Times Interest Earned Ratio* is used to measure a company’s ability to meet interest payments on its debt. Also referred to as the “interest coverage” or fixed-charge coverage”, the ratio provides an indication to lenders and investors as to whether the company is likely to run into any financial trouble. A high ratio means that the company’s earnings significantly exceed its interest obligations, so it continues to be able to meet these obligations. A low ratio puts the company’s ability to meet its debt obligations in question and can forewarn of the possibility of bankruptcy.

#### What are Leverage Ratios?

A leverage ratio refers to any of the financial ratios that are used to provide an indication of a company’s ability to meet its financial obligations. While there are several different leverage ratios, the best known is the debt-to-equity ratio. In general, financial leverage ratios are used to analyze the relationships between debt, equity, assets, and interest expense.

#### To Use the Times Interest Earned Ratio Calculator Below

(1) Go to Yahoo! Finance and enter the stock symbol in the *Get Quotes* window. On the lower left-hand side, click on *Income Statement* under *Financials*.

#### Calculate and Interpret the Time Interest Earned Ratio

The formula for the times interest earned ratio can be written as:

##### Times Interest Earned Ratio = (Net Income + Interest Expense + Income Tax Expense)

/ Interest Expense

As a general rule, when a company’s times interest earned ratio is 1.5 or lower, its ability to meet interest expenses should be questioned. If the ratio falls below 1, the company is not producing earnings to cover its interest expenses. Additionally, creditors and investors will explore the trend the ratio is demonstrating to develop an understanding of the firms ability to meet its interest obligations over time. The general rule is that the more volatile the company’s earnings, the higher the times interest earned ratio should be.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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