Time Interest Earned Ratio Analysis

Time Interest Earned Ratio Analysis

See Also:
EBITDA Definition
Debt Ratio
Financial Ratios
Fixed Charge Coverage Ratio
Debt to Equity Ratio
Long Term Debt to Total Asset Ratio Analysis
Current Ratio Definition

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.
time interest earned ratio analysis

ARTICLES YOU MIGHT LIKE

The Struggles of Private Company Accounting

Hiring the right accountant  When I meet a business owner operating at a successful $10 million in revenue, they often mention, “My CPA”… I immediately know that CEO/Entrepreneur is referring to their Tax CPA.  That is because one thing that all Entrepreneurs have in common is that they must file a tax return.  So, from

Read More »

IN CRISIS? GET A STRATEGIC CFO! – CEO Blindspots Podcast

Friend of the firm, Birgit Kamps, recently had Strategic CFO President, Dan Corredor, as a guest on her podcast, CEO Blindspots. CEO BLINDSPOTS HOST: Birgit Kamps. She was speaking five languages by the age of 10, and lived in five countries with her Dutch parents prior to becoming an American citizen. Birgit’s professional experience includes starting

Read More »

SHRM calls ICHRA the 401K for Group Health Benefits

Fed-up with group health insurance? ICHRA is the new way to offer great health benefits and avoid ACA penalties, SHRM calls it the 401K for group health benefits.  In 2020 the Department of Labor, HHS and IRS changed the rules for employer health benefits. They changed the Affordable Care Act mandates and penalties for every

Read More »

JOIN OUR NEXT SERIES

Financial Leadership Workshop

MARCH 28TH-31ST 2022

SHARE THIS ARTICLE

JOIN THE NEXT STRATEGIC CFO™ SERIES

Strategic CFO™ Financial Leadership Workshop
The Art of the CFO®

Days
Hours
Min
Sec

September 12-15th 2022