Time Interest Earned Ratio Analysis

# Time Interest Earned Ratio Analysis

## Time Interest Earned Ratio Analysis Definition

Time interest earned ratio (TIE), also known as interest coverage ratio, indicates how well a company can cover its interest payments on a pretax basis. The larger the time interest earned, the more capable the company is at paying the interest on its debt.

## Time Interest Earned Ratio Formula

Use the following formula to calculate Time Interest Earned Ratio:

Times Interest Earned Ratio = EBIT / Total Interest

### Time Interest Earned Ratio Calculation

EBIT: earnings before interest and taxes. For example, a company has \$10,000 in EBIT, and \$1,000 in interest payments. As a result, calculate times interest earned ratio as 10,000 / 1,000 = 10
This means that a company has earned ten times its interest charges.

### Times Interest Earned Ratio Analysis

Times interest earned ratio measures a company’s ability to continue to service its debt. It is an indicator to tell if a company is running into financial trouble. A high ratio means that a company is able to meet its interest obligations because earnings are significantly greater than annual interest obligations. However, a high ratio can also mean that a company has an undesirably low level of leverage or pays down too much debt with earnings that could be used for other investment opportunities to get higher rate of return.
A lower times interest earned ratio means fewer earnings are available to meet interest payments. Failing to meet these obligations could force a company into bankruptcy. It is used by both lenders and borrowers in determining a company’s debt capacity.

#### Times Interest Earned Benchmarking Resources

For statistical information about industry financial ratios, please click the following website: www.bizstats.com and www.valueline.com.

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