times interest earned
A solvency ratio measuring how many times a company can cover its interest expense with earnings before interest and taxes, indicating debt repayment ability.
Example
“A times interest earned ratio of 8x meant the company earned 8 times its interest expense — comfortably solvent.”
Memory Tip
TIMES INTEREST EARNED = how many times over can you pay interest? Higher = more financial cushion.
Why It Matters
Understanding times interest earned helps you evaluate whether a company or borrower can reliably pay their debts, which is crucial if you are considering investing in the company or lending money to them. A strong ratio indicates financial stability and lower risk, making it an important metric for assessing the safety of your investments or loans.
Common Misconception
Many people assume that times interest earned is the same as debt-to-income ratio, but they measure different things. Times interest earned focuses specifically on how earnings cover interest payments, while debt-to-income ratio measures total debt obligations against overall income.
In Practice
If a company has earnings before interest and taxes of 500,000 dollars and annual interest expenses of 100,000 dollars, its times interest earned ratio is 5.0. This means the company earns enough to cover its interest payments five times over, suggesting it has a comfortable cushion and low risk of defaulting on its debt obligations.
Etymology
TIMES (how many times) INTEREST (debt cost) EARNED (generated). How many TIMES is interest EARNED by operating income.
Common Misspellings
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Related Terms
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See Also
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