How to calculate the times interest earned ratio?
The times interest earned ratio will indicate the company’s ability to pay off interest charges as they become due. This is a longterm solvency measurement. The formula for the calculating the ratio is to divide EBIT by interest expense:
For example, if Pebble Golf Course had EBIT of $100 and interest expense of $20, the times interest earned ratio would be 5.0 or 5x.
A company wants their times interest earned ratio to be as high as possible because it means that they can easily cover their debt and interest requirements. So if Pebble Golf had a ratio of 10x instead of 5x, then that means they can better cover their debt requirements.
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