Times Interest Earned Ratio Analysis

Definition: The Times Interest Earned Ratio (TIER) is used to assess the firm's ability to pay its interest charges out of its earnings from operations. It can be calculated by using the following formula:

TIER = EBIT / Interest expense
Or: = Operating income / Interest expense
(EBIT refers to earnings before interest and taxes)

Example 1:
MBA Ltd. has $260,000 in EBIT and $52,000 in interest payments. Then, the times interest earned ratio will be: 260,000 / 52,000 = 5
Explanation: This means that the company has earned 5 times its interest charges.

Example 2:
Calculate the Times Interest Earned Ratio, given the following information:
Sales Revenue $200,000
Operating expenses $42,000
Non-operating income $2,000
Interest charges on long-term debt $16,000

Solution:
EBIT = Operating Revenue – Operating Expenses + Non-operating Income = 200,000 - 42,000 + 2,000 = $160,000
TIER = 160,000 / 16,000 = 10 times

* Next: Debt Service Coverage Ratio Formula and Example
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