The risk of a company not being able to pay its liabilities increases sharply when times interest earned falls below 1.5 to 2.0 and remains at that level or lower for several time periods.

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Times interest earned is a measure of a company's ability to cover its interest payments with its earnings. When this ratio falls below 1.5 to 2.0, it indicates that the company may not be generating enough income to meet its interest obligations. If this persists over several time periods, the risk of the company not being able to pay its liabilities (including interest) increases sharply.

The Risk of a Company Not Being Able to Pay