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Operating Profit
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| Times Interest Earned =
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Interest Expense
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Explanation of Times Interest Earned:
The Times Interest Earned compares Operating Profits to the
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.
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