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Times Interest Earned Ratio

 

‘Times interest earned ratio' compares ‘earnings before interest and taxes’ of the company to its interest expenses. Low ratio means that company may be in dangerous situation and its interest expenses are relatively high compared to company’s operating income. The normal ratio meaning depends on many factors as the sector of a company, stability, asset structure and other; however, if this ratio is lower than 1, such company might be at real risk and should be set under the deeper analysis. 

 

Formula


Times interest earned ratio = EBIT/ Interest expenses

 

Basically, this ratio is no different from ‘interest coverage ratio’; another similar ratio is ‘cash coverage ratio’ where EBITDA instead of EBIT is used.

 






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