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Interest coverage ratio

Method of calculation

Formula for times interest earned (TIE), i.e. interest coverage ratio: (gross profit + interest) / interest * 100%

Ratio's description

This ratio analyses the coverage of interest with gross profit, since the interest is written off the tax base (decreasing the value of profit before taxation). The total of gross profit and interest in the numerator is an equivalent of the maximum amount which the entrepreneur may have to pay due to interest, without loss. The greater the ratio's values, the better the ability of the company to cover the interest-related liabilities (and the better the creditworthiness and debt capacity).

Ratio's interpretation

  • When assessing the changes in ratio's value over time (over few periods):
    • the increase of ratio's value is assessed positively and interpreted as an improvement of the company's ability to cover the interest-related liabilities,

       

    • the decrease of ratio's value is assessed negatively and interpreted as a deterioration of the company's ability to cover the interest-related liabilities.

       

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