Sitemap

Times interest earned definition

Description

Times interest earned (TIE) ratio shows the financing safety level available to creditors. It measures whether the money the company earns is enough to cover its’ interest payments. Data needed to calculate this ratio is collected from income statement.

This ratio evaluates company’s ability to cover such short term financial liabilities as interest payments. This ratio is very important for company’s creditors, for example while making a decision for company’s loan extension. In short, TIE helps to understand how many times the company can cover its’ interest payments.

Norms and limitations

If the ratio equals or goes below 1.5, doubts on company’s ability to cover its’ interest payment might occur.

If the value of TIE is below 1 it means that the company is unable to cover its’ interest payments, because it earns less money than the amount it has to pay as interests.

Formula

Earnings before interest and taxes (EBIT) equal net income plus interest expense plus taxes.

Interest expense shows how much a company must pay for the money they borrowed from banks and other creditors.