Times Interest Earned Ratio Formula and Example | Interest Coverage Ratio Explained

Welcome to Manager EDU! In this video, we explain the Times Interest Earned Ratio – also called the Interest Coverage Ratio. This important solvency ratio measures a company's ability to meet its interest payment obligations on outstanding debt using its operating profit (EBIT). A higher ratio indicates that the company's profit comfortably covers its interest expenses, meaning lower financial risk. A lower ratio suggests the company may struggle to pay interest, which is a warning sign. In this video, you will learn: What the Times Interest Earned (Interest Coverage) Ratio is. What EBIT means (Earnings Before Interest and Taxes). The formula: EBIT ÷ Interest Expense. A practical example using a full income statement. How to interpret the result (what a ratio of 10 means). Example Used (Income Statement for the year): Revenue: $1,000,000 Cost of Goods Sold: $400,000 Gross Profit: $600,000 Operating Expenses: $100,000 EBIT: $500,000 Interest Expense: $50,000 Taxes: $100,000 Net Profit: $350,000 Times Interest Earned Ratio: $500,000 ÷ $50,000 = 10 Interpretation: The company's EBIT is 10 times greater than its interest expense. For every $1 of interest payment due, the company has $10 of profit available to cover it – a very safe position. 🔗 Connect with us: Facebook:   / themanageredu   TikTok:   / manager.edu   WhatsApp Channel: https://whatsapp.com/channel/0029VaEL... #TimesInterestEarned #InterestCoverageRatio #SolvencyRatios #FinancialAnalysis #ManagerEDU