Times Interest Earned Definition and Explanation

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Quick Definition

Examines a company’s ability to pay the interest on its debt.

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Times Interest Earned Formula

Explanation of Times Interest Earned

The Times Interest Earned compares Operating Profit to Interest Expense. What this calculation provides is a way to see how well the company can cover its interest on the debt it has financed.

Importance of Times Interest Earned

This is a useful calculation to tell if a company is running into financial trouble. If a company cannot at a minimum pay the interest on its debt, then the company may be headed for serious financial trouble. The larger the Time Interest Earned, the more capable the company is at paying the interest on its debt.