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8.12 Times Interest Earned Analysis

The Times Interest Earned Ratio is an excellent profitability ratio and also one of the most common ratio that is used by lenders when making business loans. The Times Interest Earned Ratio is arrived at by dividing the Operating Income by the Interest expenses faced the small business on all its debt obligations. Thus the Times Interest Earned Ratio measures the ability of the small business to cover its interest cost from its operations.

In this analysis we can see that the times interest earned ratio is projected to be 15.1, 53.1 and 277.9 in the years 2012, 2013 and 2014 respectively.The operating income is projected to be $14,965, $32,938 and $62,467 respectively in the years ahead while the interest payments on the debt that isoutstanding on the balance sheet of Home At Last Realty is projected to be $989, $620 and $225 respectively for each year.

Clearly if, the business was to take on more debt resulting in higher interest payments, the times interest earned ratio would be impacted negatively. Alsoif the operating income were to be reduced due to slower sales and / or higher operating expenses, this ratio would again get worse.

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