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:
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.