When calculating the times interest earned ratio, you you include "interest expense on debt extinguishment" in the interest expense? Thanks!
To calculate the times interest earned (TIE) ratio, you should include only the regular interest expense in the numerator. "Interest expense on debt extinguishment" refers to the interest incurred as a result of refinancing or retiring debt before its maturity. This expense is not included in the regular interest expense because it is a one-time or extraordinary item that does not affect the ongoing operations of the business.
To calculate the TIE ratio, you need to follow these steps:
1. Determine the company's earnings before interest and taxes (EBIT). You can find this information on the company's income statement.
2. Find the interest expense on the income statement. This expense represents the cost of borrowing funds to finance the company's operations.
3. Calculate the TIE ratio by dividing EBIT by the interest expense. The formula is TIE ratio = EBIT / Interest expense.
By following these steps, you will have the TIE ratio, which indicates the company's ability to cover its interest expense with its earnings. A higher TIE ratio suggests a stronger ability to meet interest obligations, while a lower ratio indicates a higher risk of defaulting on debt payments.
Remember that while the "interest expense on debt extinguishment" is an important item to consider when analyzing a company's financial position, it should not be included in the TIE ratio calculation because it is not part of the regular interest expense.