Times-Interest-Earned Ratio

This ratio measures the firm's ability to cover its interest payments. In other words, it is the extent to which the firm's earning can fall before the firm will be unable to meet its annual interest costs. A rule of thumb is that this number should be between 5 and 10 with the closer to 10 the better.

The equation for Times Interest Earned ratio is

Time Interest Earned=Operating Profit /annual interest expense