Interest coverage is also sometimes known as the "times interest earned ratio." It is very similar to the "times fixed charges earned" ratio but focuses more narrowly on the interest portion of your debt payments.
To calculate this ratio, you can use the following formula:
Operating Income
Interest expense
|
|
By comparing the ratio of operating income to interest expense, you measure how many times your interest obligations are covered by earnings from operations. The higher the ratio, the bigger your cushion and the more able the business is to meet interest payments. If this ratio is declining over time, it's a clear indication that your financial risk is increasing.