The debt-to-equity ratio is not just indicative of a company’s selected
policy. In some industries, debt levels tend to be higher than in others. Also, individual responses to the recent
economic recession might have impacted some companies more than others.
Recent Debt-to-Equity Ratios for Several Prominent Companies
Another method to evaluate the potential problem posed by debts is to compute the times interest earned (TIE)
ratio. Normally, debt only becomes a risk if interest cannot be paid when due. This calculation helps measure how
easily a company has been able to meet its interest obligations through current operations.
Times interest earned begins with the company’s net income before both interest expense and income taxes are
removed (a number commonly referred to as EBIT). Interest expense for the period is then divided into this
income figure. For example, if EBIT is $500,000 and interest expense is $100,000, the reporting company earned
enough during the year to cover the required interest obligations five times.