Question

Which of the following is the numerator used in calculating the times interest earned ratio?

a) net income + interest expense + tax expense
b) net income + interest expense
c) net income + tax expense
d) Net income

Answer 1

The numerator for calculating the times interest earned ratio is the sum of net income, interest expense, and tax expense (option a). This measure indicates how many times a company can cover its interest expenses with its earnings.

Step-by-step explanation:

The numerator used in calculating the times interest earned ratio is option a) net income + interest expense + tax expense.


This ratio is a financial metric that measures a company's ability to pay its interest expenses on outstanding debt.


The formula for calculating this ratio is:

Times Interest Earned Ratio = (Net Income + Interest Expense + Taxes) / Interest Expense

To understand this concept with an example, consider a company with a net income of $100,000, an interest expense of $25,000, and a tax expense of $30,000.


The times interest earned ratio would be calculated as follows:

(100,000 + 25,000 + 30,000) / 25,000 = 6.2

That means the company can cover its interest expenses 6.2 times over with its earnings before interest and tax.