WallStreetMojo

WallStreetMojo

WallStreetMojo

MENUMENU
  • Free Tutorials
  • Certification Courses
  • 250+ Courses All In One Bundle
  • Login
Home » Investment Banking Tutorials » Financial Statement Analysis » Times Interest Earned Ratio Formula

Times Interest Earned Ratio Formula

What is Times Interest Earned Ratio Formula?

Times Interest Earned Ratio can be defined as a yardstick to measure the firm’s capability to repay its interest on the debt or the borrowing it has made and is calculated as the ratio of EBIT to Total Interest Expense.

Times Interest Earned Ratio Formula = EBIT/Total Interest Expense

Times Interest Earned Ratio Formula

Where,

  • EBIT is Earnings Before Interest and Tax          

The Times interest earned formula is easy to understand and use.

  • The numerator of the formula has EBIT, which is nothing but operating income before taxes, and this is actually the income generated purely from business after deducting the expenses that are incurred necessary to run that business.
  • The denominator is the total interest expense of the firm, which is a burden for the firm, and when EBIT is divided by total interest expenses, it can be interpreted as how many times the firm is earning to cover its interest obligation.

Examples of Times Interest Earned Ratio Formula

Let’s see some simple to advanced practical examples to understand it better.

You can download this Times Interest Earned Ratio Formula Excel Template here – Times Interest Earned Ratio Formula Excel Template

Example #1

Company XYZ is having operating income before taxes of $150,000, and the total interest cost for the firm for the fiscal year was $30,000. You are required to compute Times Interest Earned Ratio based on the above information.

Solution

We can use the below formula to calculate Times Interest Earned Ratio

  • EBIT: 150000
  • Total Interest Expense: 30000

Calculation of Times Interest Earned Ratio can be done using the below formula as,

Times Interest Earned Ratio Formula Example 1.1

  • = 150,000/30,00

Times Interest Earned Ratio will be –

Example 1.2

  • Times Interest Earned Ratio = 5 times.

Hence, the times’ interest earned ratio is 5 times for XYZ.

Popular Course in this category
Sale
Investment Banking Training (117 Courses, 25+ Projects)
4.9 (831 ratings)
117 Courses | 25+ Projects | 600+ Hours | Full Lifetime Access | Certificate of Completion
View Course

Example #2

DHFL, one of the listed companies, has been losing its market capitalization in recent years as its share price has started deteriorating, and from the average price of 620 per share, it has come down to 49 per share market price. The Analyst is trying to understand the reason for the same, and initialing wants to compute the solvency ratios.

Times Interest Earned Ratio Formula Example 2

You are required to compute Times Interest Earned Ratio from March 09 till March 18.

Solution

Here we are not given direct operating income, and hence we need to calculate the same per below:

We shall add sales and other income and will deduct everything else except for interest expenses.

Calculation of EBIT for Mar -09

Times Interest Earned Ratio Formula Example 2.1

  • EBIT = 619.76

Similarly, we can calculate EBIT for the remaining year

Example 2.2

Calculation of Times Interest Earned Ratio can be done using the below formula as,

Times Interest Earned Ratio Formula Example 2.3

  • =619.76 – 495.64

Times Interest Earned Ratio will be –

Example 2.4

  • Times Interest Earned Ratio = 1.25

Similarly, we can calculate for the remaining years.

Example 2.5

Example #3

Excel Industries have been facing liquidity crunches, and recently it has received an order for $650 million, but they lack funds to fulfill the order. The Debt to Equity Ratio (DE) of the firm is 2.50 already, and it wants to borrow more to fulfill the order. The Bank has, however, asked the company to maintain DE ratio maximum 3 and Times Interest Earned Ratio at least 2, and at present, it is 2.5. It currently pays $12 million as interest, and if the new borrowing puts up additional pressure of $4 million, would the firm be able to maintain Bank’s condition?

You are required to compute Times Interest Earned Ratio post new 100% debt borrowing.

Solution

First, we need to come up with EBIT, which shall be a reverse calculation.

Use the following data for calculation of times interest earned ratio

  • Time Interest Earned Ratio: 2.5
  • Total Interest Expenses: 12000000

Calculation of EBIT

Times Interest Earned Ratio Formula Example 3.1

2.5  = EBIT / 12,000,000

EBIT  = 12,000,000 x 2.5

  • EBIT = 30,000,000

Calculation of Times Interest Earned Ratio can be done using the below formula as,

Times Interest Earned Ratio Formula Example 3.2

=30000000/16000000

Times Interest Earned Ratio will be –

Example 3.3

  • Times Interest Earned Ratio= 1.88 

Therefore, the firm would be required to reduce the loan amount and raised funds internally as Bank will not accept the Times Interest Earned Ratio going down.

Relevance and Use

There are multiple uses of the Times Interest Earned ratio around the world. Mostly this ratio is used by financial institutions such as Banks, NBFC, Cooperative banks, etc. to analyze whether the borrower has the capacity to bear debt payments, and this ratio is tested along with other ratios such as debt service coverage ratio. Even the wall street analyst uses this ratio to analyze the liquidity requirement for its future CAPEX and also to check how solvent is the firm or how strong the firm is in case the firm goes bankrupt.

Calculator

You can use this below the calculator

EBIT
Average Inventory
Times Interest Earned Ratio Formula
 

Times Interest Earned Ratio Formula =
EBIT
=
Average Inventory
0
= 0
0

Recommended Articles

This article has been a guide to Times Interest Earned Ratio Formula. Here we discuss the calculation of times interest earned ratio along with practical examples and a downloadable excel template. You can learn more about financial analysis from the following articles-

  • Capital Employed Formula
  • Interest Coverage Ratio Formula
  • Stock Turnover Ratio Formula
  • DSCR Ratio
0 Shares
Share
Tweet
Share
Primary Sidebar
Footer
COMPANY
About
Reviews
Contact
Privacy
Terms of Service
RESOURCES
Blog
Free Courses
Free Tutorials
Investment Banking Tutorials
Financial Modeling Tutorials
Excel Tutorials
Accounting Tutorials
Financial Statement Analysis
COURSES
All Courses
Financial Analyst All in One Course
Investment Banking Course
Financial Modeling Course
Private Equity Course
Venture Capital Course
Excel All in One Course

Copyright © 2021. CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. CFA® And Chartered Financial Analyst® Are Registered Trademarks Owned By CFA Institute.
Return to top

WallStreetMojo

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

* Please provide your correct email id. Login details for this Free course will be emailed to you

Book Your One Instructor : One Learner Free Class
WallStreetMojo

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

* Please provide your correct email id. Login details for this Free course will be emailed to you

Let’s Get Started
Please select the batch
Saturday - Sunday 9 am IST to 5 pm IST
Saturday - Sunday 9 am IST to 5 pm IST

This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy

Login

Forgot Password?

WallStreetMojo

Free Ratio Analysis Course

Step by Step Guide to Calculating Financial Ratios in excel

WallStreetMojo

Download Times Interest Earned Ratio Formula Excel Template

New Year Offer - All in One Financial Analyst Bundle (250+ Courses, 40+ Projects) View More