Times Interest Earned

In general, a low times interest earned ratio suggests a company is overleveraged, while a high times interest earned ratio may suggest a company is “too safe” and is neglecting opportunities to magnify earnings through leverage. A times interest earned ratio below 1.0 indicates that a company is not able to meet its interest obligations.

Because a company’s failure to meet interest payments usually results in default, times interest earned is of particular interest to lenders and bondholders and acts as a margin of safety. However, because times interest earned is based on current earnings and current expenses, it primarily focuses a company’s short-term ability to meet interest obligations.

Some industries tend to have higher times interest earned than others, and cyclical companies in particular can experience significant swings in their times interest earned (especially during recessions). Thus, comparison of times interest earned is generally most meaningful among companies within the same industry, and the definition of a "high" or "low" ratio should be made within this context.