Thesis: The Times Interest Earned Ratio

Sample Thesis Paper

The Times Interest Earned Ratio is calculated by using two components of the income statement. Earnings before Interest and Tax are divided by the Interest Expense of the same period. This ratio shows the number of times interest expense can be paid by a company on an existing obligation. This ratio obviously measures the easiness for a company to pay the mark up obligation on an existing loan. The number of times it can pay off the loan should be higher then, for the company to be in a good position. Therefore, this ratio is different from the other two debt ratios mentioned above – the total debt to total asset ratio and the debt to equity ratio. The previous two are better for the company if they are on the lower side. Conversely, the times interest earned ratio has to be higher rather than lower to be favourable from the perspective of the company in question. If it is on the low side, this is interpreted as an adverse sign for the company that indicates the fact that the company has trouble in meeting its debt related interest obligations.

It is a highly precarious position for a company if it is unable to fulfil its interest related expenses. Therefore businesses have to be cautious and know their limitations when borrowing money, especially if the interest rates involved are on the higher side. Conversely, businesses find it profitable to borrow from outside rather than have an equity source of funding because the interest is tax deductible and if the return earned on the interest is greater, this added return goes to the existing equity share holders in the company (Fields 2002).

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