The times interest earned ratio indicates a firm’s long-term debt-paying ability from the income statement view. If the times interest earned is adequate, little danger exists that the firm will not be able to meet its interest obligation.

In contrary, if the firm has good coverage of the interest obligation, it should also be able to refinance the principal when it comes due. In effect, the funds will probably never be required to pay off the principal if the company has a good record of covering the interest expense.

A relatively high, stable coverage of interest over the years indicates a good record. A low, fluctuating coverage from year to year indicates a poor record. Companies that maintain a good record can finance a relatively high proportion of debt in relation to stockholders’ equity and, at the same time, obtain funds at favorable rates.