Times Interest Earned (TIE)

The times interest earned ratio, also known as interest coverage ratio, is a financial ratio that measures a company's ability to pay its interest expenses. It is calculated by dividing a company's earnings before interest and taxes (EBIT) by its interest expenses.

A high times interest earned ratio indicates that a company is generating enough cash flow to cover its interest payments. This is considered to be a sign of financial strength. A low times interest earned ratio, on the other hand, indicates that a company may be struggling to meet its interest payments. This could be a sign of financial weakness.

The times interest earned ratio is a useful tool for investors and creditors to assess a company's financial health. It can help investors determine whether a company is a good investment and creditors determine whether a company is a good credit risk.

Here is a more detailed explanation of how to calculate the times interest earned ratio:

1. Find a company's earnings before interest and taxes (EBIT). This is the amount of money a company has left after paying for its operating expenses, but before paying interest and taxes. 2. Find a company's interest expenses. This is the amount of money a company pays to its creditors for borrowing money. 3. Divide a company's EBIT by its interest expenses. This will give you the company's times interest earned ratio.

For example, if a company has EBIT of $100,000 and interest expenses of $20,000, its times interest earned ratio would be 5. This means that the company has $5 in earnings for every $1 in interest expenses.

The times interest earned ratio is a useful tool for investors and creditors to assess a company's financial health. However, it is important to note that the ratio does not take into account a company's other expenses, such as capital expenditures. As a result, the ratio can sometimes be misleading.

Nevertheless, the times interest earned ratio is a valuable tool that can be used to help investors and creditors make informed decisions about a company.