Financial Statement Analysis

FINANCIAL STATEMENT ANALYSIS

Time Interest Earning (Coverage Ratio)

What is Financial Statement Analysis?

To answer the question, see the picture below!

The Kind of Financial Statement Analysis (Ratio):

·      Liquidity Ratio

·      Solvability Ratio

·      Profitability Ratio

·      Activity Ratio

·      Coverage Ratio

Time Interest Earning

Times interest earning (also called interest coverage ratio) is the ratio of earnings before interest and tax (EBIT) of a business to its interest expense during a given period. This ratio included in coverage ratio.

Time Interest Earning Formula:

            Ratio Means:

1.      TIE<1, have problem

2.      TIE<1.5, questionable

3.      TIE>1.5, good condition

Example:

1.    A company having interest expense and earnings before interest and tax for the year ended Dec 31, 2010 of $239,000 and $3,493,000 respectively.

Solution
Times Interest Earned = $3,493,000 ÷ $239,000 ≈ 14.6

2.    Look the picture below:

Solution:

TIE = 1.759.782/694.338 = 2,53447

Company In Good Condition