Times Interest Earned (Interest Coverage)

Times Interest Earned (Interest Coverage)

Formula

$$\text{Times interest earned} = \frac{\text{Operating profit before income tax} + \text{Interest expense}}{\text{Interest expense}}$$

Explanation

• Measures how many times current profit can cover interest expense.
• Shows safety margin for paying interest.

Satisfactory level / rule of thumb

• Many analysts like coverage of 3–4 times or more.
• Lower than this may be risky, especially if profits are volatile.

Industry norm

• Stable businesses (e.g. utilities) might manage with slightly lower coverage.
• Risky industries should aim for higher coverage.

Example

• Operating profit before tax = RM500,000
• Interest expense = RM100,000

$$\text{Times interest earned} = \frac{500,000 + 100,000}{100,000} = \frac{600,000}{100,000} = 6 \text{ times}$$

Profit can cover interest 6 times – usually comfortable.