Times Burden Covered Ratio Lab

Scenario presets

Operating Earnings & Financing Obligations

Operating income (EBIT) ($)

Annual interest expense ($)

Mandatory principal repayment ($)

Preferred stock dividends ($)

Effective tax rate (%)

Min lender covenant hurdle (x)

Coverage Ratios & Solvency Diagnostics

Calculating debt coverage...

Times Burden Covered

Times Burden Covered: -
Times Interest Earned (TIE): -
Amortization Coverage Drag: -
Pre-Tax Principal Service Burden: -
Pre-Tax Preferred Dividend Burden: -
Total Pre-Tax Financing Burden: -
Pre-Tax Operating Surplus / (Deficit): -
Bank Covenant Compliance Status: -

Pre-Tax Debt Service Reconciliation Schedule

Reconciliation demonstrating contractual debt obligations, income tax gross-up penalties, and operating cash cushion.

Reconciliation schedule detailing operating earnings, interest expense, principal repayment, tax gross-up, and net coverage surplus.
Financing Obligation	Nominal Cash ($)	Tax Deductibility	Pre-Tax Burden ($)	% of EBIT

Sensitivity Analysis 1: Operating Income (EBIT) vs. Principal Repayment on Times Burden Covered (x)

Comprehensive debt coverage ratio sensitivity across operating earnings and annual amortization requirements.

Times burden covered ratio by operating income and principal repayment. Rows change operating income, columns change principal.
EBIT \ Principal Repayment	-40%	-20%	Base ($1.50M)	+20%	+40%

Sensitivity Analysis 2: Interest Expense vs. Tax Rate on Total Pre-Tax Debt Burden ($)

Total pre-tax financing requirement sensitivity across interest expense levels and corporate tax rates.

Total pre-tax burden dollar amount by interest expense and tax rate. Rows change interest expense, columns change tax rate.
Interest Expense \ Tax Rate	15.0%	18.0%	Base (21.0%)	25.0%	30.0%

Formulas and worked example

$\text{Pre-Tax Principal Burden} = \frac{\text{Principal Repayment}}{1 - \text{Tax Rate}}$
$\text{Pre-Tax Preferred Dividend Burden} = \frac{\text{Preferred Dividends}}{1 - \text{Tax Rate}}$
$\text{Total Pre-Tax Financing Burden} = \text{Interest Expense} + \frac{\text{Principal Repayment}}{1 - \text{Tax Rate}} + \frac{\text{Preferred Dividends}}{1 - \text{Tax Rate}}$
$\text{Times Burden Covered} = \frac{\text{EBIT}}{\text{Total Pre-Tax Financing Burden}}$
$\text{Times Interest Earned (TIE)} = \frac{\text{EBIT}}{\text{Interest Expense}}$
$\text{Amortization Coverage Drag} = \text{TIE} - \text{Times Burden Covered}$
$\text{Operating Earnings Surplus / Deficit} = \text{EBIT} - \text{Total Pre-Tax Financing Burden}$

An enterprise generates $12,000,000 in EBIT, pays $2,000,000 in contractual interest expense, and faces $1,500,000 in mandatory term loan principal amortization under a 21.0% tax rate. Looking only at interest, its Times Interest Earned appears pristine at 6.00x ($12M / $2M). However, because principal must be paid in after-tax funds, servicing $1.5M of principal requires $1,898,734 in pre-tax operating earnings [$1,500,000 / (1 - 0.21)]. Total pre-tax financing burden is $3,898,734 ($2M + $1.899M). The true Times Burden Covered ratio is 3.08x ($12M / $3.899M), revealing a substantial 2.92x amortization drag that traditional TIE hides. With a bank covenant requirement of 1.50x, the firm maintains $6,151,266 in surplus pre-tax cushion.

Self-check quiz

1. Why does traditional Times Interest Earned (TIE) dangerously overestimate a company's debt solvency?

TIE accounts only for interest, completely ignoring contractual debt principal amortization that legally must be repaid

TIE excludes sales tax collected from customers

2. Under a 25% corporate tax rate, how much pre-tax EBIT is required to repay $3,000,000 in loan principal?

$4,000,000 [$3,000,000 / (1 - 0.25)]

$2,250,000 [$3,000,000 × (1 - 0.25)]

3. A company has $10M in EBIT, $2M in interest, $2M in principal repayment, and a 20% tax rate. What is its Times Burden Covered ratio?

2.22x [$10M / ($2M + ($2M / 0.8)) = $10M / $4.5M]

5.00x [$10M / $2M]

4. What occurs if a firm's Times Burden Covered ratio falls below 1.0x?

Operating income is insufficient to cover total debt service, forcing the firm to drain cash, borrow more, or face default

The firm receives an automatic tax refund

Frequently asked questions

What is the Times Burden Covered ratio and how is it calculated?

The Times Burden Covered ratio evaluates a firm's operating earnings capacity to service all mandatory debt obligations, including both interest and principal payments plus preferred dividends. It is calculated as: Times Burden Covered = EBIT / [Interest + (Principal Repayments / (1 - Tax Rate)) + (Preferred Dividends / (1 - Tax Rate))].

Why must principal repayments and preferred dividends be grossed up for taxes?

Unlike interest expense, which is tax-deductible, principal repayments and preferred stock dividends must be satisfied using after-tax earnings. To determine the pre-tax EBIT required to satisfy these obligations, they must be divided by (1 - Tax Rate).

How does Times Burden Covered differ from traditional Times Interest Earned (TIE)?

Traditional Times Interest Earned (EBIT / Interest) measures only interest service capacity, completely ignoring mandatory debt amortization. A firm can display a healthy TIE of 4.0x while facing insolvency if heavy term loan principal maturities exhaust its operational cash flow.

What is a safe benchmark range for the Times Burden Covered ratio?

Commercial lending syndicates typically mandate a minimum Times Burden Covered (or Debt Service Coverage) ratio between 1.25x and 1.50x. A ratio below 1.0x indicates an operating deficit where earnings cannot service contractual debt amortization, requiring refinancing or asset sales.