Times interest earned is really the number of times interest expense can be covered by operating income. Times interest earned is a measure of solvency. Times interest earned is calculated as operating income divided by interest expense. It tells how many more times a company’s operating income is greater than the interest claims on those earnings. This is one ratio where the bigger the number the better. This ratio can’t be too big. Here is the Income Statement of a sample company. We’ll use the highlighted operating income and interest expense to determine the times interest earned.
For 2016, operating income divided by interest expense gives us times interest earned of 8.82 times. This result is probably good because the company’s operating income is significantly higher than the interest expense claims, but it does depend a little bit on the industry and the company’s philosophy regarding debt financing. and the company’s philosophy regarding debt financing..