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Times Interest Earned (TIE)

Times Interest Earned (TIE), also known as the interest coverage ratio, is a financial metric used to measure a company's ability to meet its debt obligations. It is calculated by dividing a company's earnings before interest and taxes (EBIT) by its interest expenses. A higher TIE ratio indicates that a company can comfortably cover its interest payments with its earnings, signaling financial strength. Conversely, a lower ratio suggests potential difficulty in meeting debt obligations.

Example

A company with an EBIT of $10 million and annual interest expenses of $2 million has a TIE ratio of 5, meaning it earns five times what is needed to cover its interest payments.

Key points

• Measures a company’s ability to pay interest on its debt.

• Calculated as EBIT divided by interest expenses.

• A higher ratio indicates stronger financial health and debt coverage.

Quick Answers to Curious Questions

It helps creditors assess a company’s ability to service its debt, indicating whether the company is likely to default on interest payments.

A low TIE ratio suggests that the company may struggle to cover its interest payments, raising concerns about its solvency.

By increasing EBIT through higher revenues or reducing debt to lower interest expenses, a company can improve its TIE ratio.
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