The times interest earned ratio, sometimes referred to as the interest coverage ratio, is a leverage ratio designed to measure the amount of earnings a business has available has to make interest payments on its borrowings.
The earnings before interest and tax is what is left of the income after the business has paid all its operating expenses, this at the very least should be sufficient to pay the interest due on the borrowings of the business.
If the times interest earned cover falls too low, the business may be deemed to be a high risk by the lenders and as such may find its borrowing facilities reduced or even withdrawn.
The ratio is calculated using the times interest earned ratio formula by dividing the earnings before interest and tax by the interest expense.
Both figures are found on the income statement of the business.
Using the times interest earned Calculator
The Excel times interest earned calculator, available for download below, calculates the times interest earned ratio by entering details relating to the earnings before interest and tax, and interest expense from the income statement. The calculator is used as follows:
- The earnings before interest and tax is entered. Earnings before interest and tax (EBIT) is found on the income statement of the business. It is sometimes referred to as profit before interest and tax (PBIT).
- The interest expense is entered. The interest expense is also found on the income statement of the business and represents the amount of interest charged on borrowings for the year.
- The times interest earned ratio is calculated. The times interest earned calculator calculates the TIE ratio.
There is no correct value for the times interest earned ratio as it depends on the industry in which the business operates. It is useful to compare the calculated figure with other businesses in you industry using figures available from published financial statements. The times interest ratio should always be higher than 1 otherwise the business is not generating enough income to meet its interest obligations.
Times Interest Earned Calculator Download
The times interest earned spreadsheet calculator is available for download in Excel format by following the link below.
Users use this times earned interest ratio calculator at their own risk. We make no warranty or representation as to its accuracy and we are covered by the terms of our legal disclaimer, which you are deemed to have read. This is an example of a tool that you might use to show how to calculate times interest earned. It is purely illustrative. This is not intended to reflect general standards or targets for any particular business, company or sector. If you do spot a mistake in the times interest earned calculator, please let us know and we will try to fix it.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years in all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.