What is the formula for calculating the times interest earned ratio, and what does it indicate about a firm's ability to pay interest?

The times interest earned ratio is calculated using the formula: Times Interest Earned = Net Operating Income (EBIT) / Interest Expense. This ratio indicates a firm's ability to pay its interest expenses; a higher ratio suggests a greater capacity to meet interest obligations.

The times interest earned ratio measures how well a firm can cover its interest expenses with its operating income. By comparing net operating income (or EBIT) to interest expense, stakeholders can assess the firm's financial health regarding its debt obligations. A higher ratio indicates that the firm has more earnings available to pay interest, reducing the risk of default.