Question

What is time ratio ? Give two examples.

Answer 1

Answer:

The times interest earned ratio is an indicator of a corporation's ability to meet the interest payments on its debt. The times interest earned ratio is calculated as follows: the corporation's income before interest expense and income tax expense divided by its interest expense.

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Answer 2

TIME RATIO

• The times interest earned (TIE) ratio is also known as the interest coverage ratio. It measures how handily a company can pay its debts with its existing income. To calculate this ratio, one needs to divide income by the total interest payable on bonds or other forms of debt. After executing this calculation, one will see a number which ranks the company’s potential to cover interest fees with pre-tax earnings. Normally, the higher the TIE, the more cash the company will have left over.

EXAMPLE 1:-

• Determine a business calculates its EBIT as Rs 3,500,000 and its interest expense is Rs 142,000. Using the formula, lock these values in and find times interest earned: TIE = Earnings before interest and taxes (EBIT) ÷ (total interest expense)
• This implies the times interest earned ratio is 24.6, which demonstrates the business has about 24 times more than the amount it owes in interest on the debt.

EXAMPLE 2:-

• If a company has Rs 135,000 in total debt liability and the average interest rate across all of its debt liability is 3% then one needs to multiply these two values together to get the total interest expense.
• Once one has both EBIT and interest expense values, one can use the formula to calculate the times' interest is earned.

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