Q30. Times interest earned ratio
How is the times interest earned ratio calculated?
A30.
Times interest earned ratio = (A) / (B)
Where,
(A) = Earnings before interest and taxes (EBIT)
(B) = Interest expense
Earnings before interest and taxes (EBIT)
= Net income + Interest expense + Tax expense
[Entity 30-a]
Earnings before interest and taxes (EBIT) = $740,000
Interest expense = $40,000
Times interest earned ratio
= $740,000 / $40,000 = 18.5
[Entity 30-b]
Earnings before interest and taxes (EBIT) = $870,000
Interest expense = $50,000
Times interest earned ratio
= $870,000 / $50,000 = 17.4
[Note]
Times interest earned ratio is higher for Entity 30-a than for Entity 30-b.
Thus Entity 30-a is better prepared in long-term solvency than Entity 30-b.
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