Tag Archives | EBIT

Time Interest Earned Ratio Analysis

See Also:
EBITDA Definition
Debt Ratio
Financial Ratios
Fixed Charge Coverage Ratio
Debt to Equity Ratio
Long Term Debt to Total Asset Ratio Analysis
Current Ratio Definition

Time Interest Earned Ratio Analysis Definition

Time interest earned ratio (TIE), also known as interest coverage ratio, indicates how well a company can cover its interest payments on a pretax basis. The larger the time interest earned, the more capable the company is at paying the interest on its debt.

Time Interest Earned Ratio Formula

Use the following formula to calculate Time Interest Earned Ratio:

Times Interest Earned Ratio = EBIT / Total Interest

Time Interest Earned Ratio Calculation

EBIT: earnings before interest and taxes. For example, a company has $10,000 in EBIT, and $1,000 in interest payments. As a result, calculate times interest earned ratio as 10,000 / 1,000 = 10

This means that a company has earned ten times its interest charges.

Times Interest Earned Ratio Analysis

Times interest earned ratio measures a company’s ability to continue to service its debt. It is an indicator to tell if a company is running into financial trouble. A high ratio means that a company is able to meet its interest obligations because earnings are significantly greater than annual interest obligations. However, a high ratio can also mean that a company has an undesirably low level of leverage or pays down too much debt with earnings that could be used for other investment opportunities to get higher rate of return.

A lower times interest earned ratio means fewer earnings are available to meet interest payments. Failing to meet these obligations could force a company into bankruptcy. It is used by both lenders and borrowers in determining a company’s debt capacity.

Times Interest Earned Benchmarking Resources

For statistical information about industry financial ratios, please click the following website: www.bizstats.com and www.valueline.com.

time interest earned ratio analysis

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Return on Capital Employed (ROCE)

See Also:
Return on Asset Analysis
Return on Equity Analysis
Financial Ratios
Return on Invested Capital (ROIC)
Current Ratio Analysis

Return on Capital Employed (ROCE) Definition

The return on capital employed ratio is used as a measurement between earnings, and the amount invested into a project or company.

Return on Capital Employed (ROCE) Meaning

The return on capital employed is very similar to the return on assets (ROA), but is slightly different in that it incorporates financing. Because of this the ROCE calculation is more meaningful than the ROA. The ROCE is generally used to find out how efficient and profitable a company is from year to year. As it is a percentage a company can locate problems or areas of improvement with the fluctuation of this ratio from year to year.

Return on Capital Employed (ROCE) Equation

The return on capital employed equation is as follows:

ROCE = EBIT or NI/(Total Assets – Current Liabilities)

Note: The earnings before interest and taxes, known as the operating income, is normally used, but people can also use the Net Income if they would like to incorporate the net interest and taxes into the ROCE formula.

Return on Capital Employed (ROCE) Example

Tim found that the ROCE last year is 16%. He would like to compare this number to the current ROCE. He begins by finding the following numbers in the Balance Sheet as well as the Income Statement:

Net Income = $50,000
Total Assets = $360,000
Current Liabilities = $35,000

ROCE = $50,000/($360,000 – $35,000) = 15%

Note: The drop in this number means that Tim’s company is not as efficient as it used to be or that it decreased it current liabilities.

return on capital employed

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return on capital employed

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Operating Profit Margin Ratio

See Also:
Operating Profit Margin Ratio Example
Net Profit Margin
Operating Income (EBIT)
Financial Ratios
Gross Profit Margin Ratio Analysis
Interest Expense

Operating Profit Margin Ratio

The operating profit margin ratio indicates how much profit a company makes after paying for variable costs of production such as wages, raw materials, etc. It is also expressed as a percentage of sales and then shows the efficiency of a company controlling the costs and expenses associated with business operations. Furthermore, it is the return achieved from standard operations and does not include unique or one time transactions. Terms used to describe operating profit margin ratios this include the following:

Operating Profit Margin Formula

In order to calculate the operating profit margin ratio formula, simply use the following formula:

Operating profit margin = Operating income ÷ Total revenue

Or = EBIT ÷ Total revenue

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Operating Profit Margin Calculation

The operating profit margin calculations are easily performed, including the following example.

Operating Income = gross profit – operating expenses

For example, a company has $1,000,000 in sales; $500,000 in cost of goods sold; and $225,000 in operating costs. In conclusion, operating profit margin = (1,000,000 – 500,000 – 225,000)= $275,000 / 1,000,000 = 27.5%

In conclusion, this company makes $0.275 before interest and taxes for every dollar of sales.

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Operating Profit Margin Ratio

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Operating Profit Margin Ratio

Resources

For statistical information about industry financial ratios, please go to the following websites: www.bizstats.com and www.valueline.com.

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Operating Income Example

See Also:
Operating Income (EBIT)

Operating Income Example

For example, Marilyn is the CEO of a company which creates educational children’s toys. Marilyn loves her work and truly knows her business. With the support of her family and local bank Marilyn has taken her idea from startup to success in only 3 years. Pleased with her achievement, she wants to maintain what she has created.

Marilyn has come upon the bank period for the loan she has taken to start her business. She is almost finished with paying her liability and wants to make sure she exits the deal on good terms. Marilyn needs to make sure all of the financial ratios in her loan agreement are satisfactory in the view of her bank. This mainly revolves around her company operating margin.

Marilyn contacts her accountant. She needs to access her financials in order to find her EBIT to assure it is complaint with the loan covenant. Her company results are listed below:

$1,000,000 in revenues; $250,000 in cost of goods sold; and $100,000 in operating expenses.

EBIT = $1,000,000 – ($250,000 + $100,000) = $650,000

Marilyn then reviews her paperwork with the bank. She finds that she is complaint with their requirements and will soon be able to complete both interest and principal payments. She is extremely relieved because she is lifting a huge weight off of her shoulders. Additionally, she is in good standing with the bank and could use them as a source for capital to grow her business further. She is excited about what the future holds for her experience as an entrepreneur.

Operating Income Calculation

Operating income calculations simply involve addition and subtraction. When performed properly they serve great value with a relatively little amount of effort.

Example: A company has $1,000,000 in revenues; $250,000 in cost of goods sold; and $100,000 in operating expenses.

EBIT = $1,000,000 – ($250,000 + $100,000) = $650,000

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Operating Income
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Operating Income

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Operating Income (EBIT)

See Also:
Operating Income Example
EBITDA Definition
Net Income
Free Cash Flow
Operating Profit Margin Ratio
Time Value of Money (TVM)

Operating Income (EBIT) Definition

What is operating income? Earnings before interest and tax, also know as operating income (EBIT), is defined as a measure of a company’s profit from ordinary operations, excluding interest and tax. EBIT is also called net operating income, operating profit, or net operating profit. Calculate it using the following equation: revenues minus cost of goods sold (COGS) and other operating expenses.


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What is Operating Income? Operating Income Explanation

Operating income is a measure of company operations. It is also one of the most common financial ratios used for valuing a company as a whole. Therefore, it is very valuable, as well, as a measure of the success of a company from period to period. Additionally, it is the measure of the ability of a company to cover costs and make profit. Operating income ratios leaves out interest and taxes, so it does not serve as a net value of the wealth created from a business. More, it is a general tool used to evaluate the operating process and efficiency which ultimately lead to company profits.

One of the overall advantages of using operating income (EBIT) over other financial ratios is in the simplicity and standardization of calculation. Though interest and taxes play an important role in the financial health of a company they do not, generally, make or break the model for success. When evaluating operating income vs net income, ask whether you need a measurement of company operations as a whole or company operations as they lead to profit.

Operating Income Formula

The operating income formula provides a simple calculation for evaluating common business models. Calculating this equation is fairly simple when one has the three following values: revenues, cost of goods sold, and operating expenses.

Operating Profit = Revenues – (COGS + Operating Expenses)

Now, you know your operating income which is an important factor of valuing a company. If you’re looking to sell your company, then download the free Top 10 Destroyers of Value whitepaper to learn how to maximize your value.

Operating income (EBIT), What is Operating Income

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Operating Income (EBIT), What is Operating Income

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Fixed Charge Coverage Ratio Analysis

See Also:
Fixed Charge Coverage Ratio Definition
Operating Income (EBIT)
Debt Service Coverage Ratio
Fixed Costs
Times Interest Earned Ratio
Free Cash Flow
Financial Ratios

Fixed Charge Coverage Ratio Analysis Formula

See the fixed charge coverage ratio analysis formula below:

Times Interest Earned Ratio = (EBIT + fixed charge) ÷ (total interest + fixed charge)

Fixed Charge Coverage Ratio Calculations

Fixed charge coverage ratio calculations can be simple or difficult depending on the complexity of the associated financial information. For example, a company has $ 16,000 in EBIT, $ 1,000 in interest payments and $2,000 in lease payments.

Fixed charge coverage ratio = (16,000 + 2,000) / (1,000 +2,000) = 8

This means that a company has earned eight times its fixed charges.


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Fixed Charge Coverage Ratio Example

For example, Ron owns a small business which provides artisan-quality roofing services to upscale homes. Ron has carved a unique niche for his company over time. He is proud of his achievements and satisfied customer base.

Recently, the recession has caused Ron to see less jobs for Spanish tile roofing. With this serving as the bread-and-butter of Ron’s company, he wants to be prepared for additional dips in his revenues due to less sales.

Ron, essentially, wants to perform fixed charge coverage ratio analysis to assure that his company can survive the recession.

Ron speaks to his controller and performs the following equation. Ron’s company has $ 16,000 in EBIT, $ 1,000 in interest payments and $2,000 in lease payment. So…

Fixed charge coverage ratio = (16,000 + 2,000) / (1,000 +2,000) = 8

After speaking with his controller, Ron is confident that his company can survive an extended recession. He needs to check he has not violated his fixed charge coverage ratio covenant (bank requirement) for his bank loan.

Ron’s company controller looks at the agreement. Ron, after a little work, realizes that his company has not violated a covenant. Despite the fact that Ron’s company has an acceptable fixed charge coverage ratio, EBITDA will remain the same for his covenants with the bank to stay unbroken. Ron respects the value of keeping up-to-date with financial statements, as well as bank agreements, thanks to the hand of his company accountant.

fixed charge coverage ratio analysis

Resources

For statistical information about industry financial ratios, please click the following website: www.bizstats.comand www.valueline.com.

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Debt Service Coverage Ratio

See also:
Operating Income (EBIT)
Financial Ratios
EBITDA Definition
Loan Agreement
Time Interest Earned Ratio Analysis
Net Income
Benchmarking
Fixed Charge Coverage Ratio
Times Interest Earned Ratio
Free Cash Flow

Debt Service Coverage Ratio

The debt service coverage ratio (DSCR) is a financial ratio that measures the company’s ability to pay their debts. In broad terms the DSCR is defined as the cash flow of the company divided by the total debt service.

A DSCR > 1.0 indicates that the company is generating sufficient cash flow to pay their debts. A DSCR < 1.0 should be a cause for concern because it indicates that the company is negatively cash flowing.

Debt Service Coverage Ratio formula:

DSCR calculation = EBIT divided by (interest + (principal/ 1-tax rate)

In some cases in calculating the debt service coverage ratio EBITDA is used instead of EBIT since EBITDA is a closer approximation of cash flow. When calculating the debt service ratio denominator leases should be included along with other debt service costs.

Debt Service Coverage Ratio (DSCR) example:

Assumptions:
Net Income = $643,800 Interest Expense = $240,000 Taxes = $331,655 Principal Payments = $300,000 Tax Rate = 34%

DSCR numerator = EBIT = $643,800 + $240,000 + $331,655 = $1,215,455

DSCR denominator = interest + (principal payments / (1-tax rate)) = $240,000 + ($300,000 / (1-34%) = $695,545

DSCR = $1,215,455 / $695,545 = 1.75

Uses of Debt Service Coverage Ratio:

The DSCR is used as a financial tool for trend analysis. By following the increase or decrease of the DSCR over time a company can determine if they are building liquidity in the businessBenchmarking the DSCR against other companies in similar industries is useful in setting goals for the corporation to attain.

Finally, the DSCR is often used in loan covenants for triggering a default if deteriorating financial results occur.

debt service coverage ratio

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