The time’s interest earned ratio, occasionally known as the interest coverage ratio, has been a policy ratio that measures the proportionate quantity of income that may be utilised to pay interest expenses later on.
In certain respects, the instances curiosity rate is considered a solvency ratio for the reason that it steps a company’s ability to generate interest and debt service obligations. Because those interest payments are typically made on a long term foundation, they are frequently treated as a continuing, fixed expenditure. Like most fixed expenditures, in the event the corporation may make the payments, it could go bankrupt and cease to exist. Thus, this ratio could be considered a solvency ratio.
The times’ interest earned ratio is calculated by dividing income before interest and income taxes by the interest expense.