Times Interest Earned Ratio Calculator
Calculate the Times Interest Earned (TIE) ratio to assess a company's ability to meet its interest payment obligations. This ratio measures how many times a company can cover its interest expenses with its earnings.
Financial Information
Ratio Results
Times Interest Earned Ratio:
0.00x
EBIT:
$0
Interest Expense:
$0
Risk Assessment
Coverage Quality:
N/A
Default Risk:
N/A
Credit Rating Impact:
N/A
Financial Health
Debt Service Capacity:
N/A
Interest Burden:
0.00%
Financial Flexibility:
N/A
Understanding Times Interest Earned Ratio
The Times Interest Earned (TIE) ratio measures a company's ability to meet its interest payment obligations. It shows how many times a company can cover its interest expenses with its earnings before interest and taxes (EBIT), providing insight into financial stability and debt servicing capacity.
Times Interest Earned Ratio Formula
Basic Formula
- TIE Ratio = EBIT / Interest Expense
- EBIT = Earnings Before Interest and Taxes
- Shows times interest can be paid
- Higher ratio indicates better coverage
Example Calculation
- EBIT: $500,000
- Interest Expense: $75,000
- TIE Ratio: $500,000 / $75,000 = 6.67x
- Interest covered 6.67 times
Ratio Interpretation
Coverage Levels and Risk Assessment
Understanding different coverage ratios
Strong Coverage (8x+)
- Excellent debt service ability
- Very low default risk
- Strong credit quality
- Attractive to lenders
Good Coverage (4x-8x)
- Strong debt service ability
- Low default risk
- Good credit quality
- Favorable borrowing terms
Adequate Coverage (2.5x-4x)
- Moderate debt service ability
- Moderate default risk
- Fair credit quality
- Standard borrowing terms
Weak Coverage (1.5x-2.5x)
- Marginal debt service ability
- High default risk
- Poor credit quality
- Restrictive covenants
Insufficient Coverage (<1.5x)
- Unable to service interest
- Very high default risk
- Very poor credit quality
- Potential bankruptcy
Industry Benchmarks
| Industry | Typical Range | Key Factors |
|---|---|---|
| Utilities | 3x-6x | Stable cash flows, regulated returns, capital intensive |
| Technology | 10x-20x | High margins, low debt, growth focus |
| Manufacturing | 4x-8x | Cyclical revenues, equipment financing |
| Real Estate | 2x-4x | Property leverage, interest rate sensitivity |
Components of the Ratio
EBIT (Earnings Before Interest and Taxes)
- Operating profit measure
- Before interest and tax expenses
- Shows operating profitability
- Available for debt service
Interest Expense
- Cost of borrowing
- Includes all interest payments
- Both short-term and long-term debt
- Fixed contractual obligation
Applications in Credit Analysis
Lending Decisions
- Creditworthiness assessment
- Loan approval criteria
- Interest rate determination
- Covenant setting
Bond Ratings
- Credit rating agency input
- Rating category determination
- Default risk assessment
- Investment grade thresholds
Limitations and Considerations
Accounting Issues
- EBIT calculation variations
- Non-operating income exclusion
- One-time charges impact
- Depreciation differences
Economic Factors
- Cyclical earnings volatility
- Interest rate changes
- Refinancing risk
- Economic downturn impact
Related Coverage Ratios
Debt Service Coverage Ratio (DSCR)
- NOI / Annual Debt Service
- Includes principal payments
- Real estate focus
- Comprehensive coverage
Fixed Charge Coverage
- (EBIT + Lease Payments) / (Interest + Lease Payments)
- Includes lease obligations
- Broader fixed charges
- More conservative measure
Improving Times Interest Earned Ratio
Increase EBIT
- Revenue growth strategies
- Cost reduction programs
- Margin improvement
- Efficiency gains
Reduce Interest Expense
- Debt refinancing
- Interest rate swaps
- Debt reduction
- Optimal capital structure
Key Takeaways for Times Interest Earned Ratio Calculator
- Times Interest Earned Ratio = EBIT / Interest Expense measures ability to pay interest on debt
- A ratio of 2.5x or higher is generally considered adequate for most industries
- Higher ratios indicate lower default risk and stronger credit quality
- The ratio is used by lenders and rating agencies to assess creditworthiness
- TIE ratio varies significantly by industry due to different business models
- The calculator helps evaluate debt capacity and financial risk
- EBIT should be normalized to exclude one-time items for accurate assessment
- Use the calculator to compare interest coverage across companies and assess borrowing capacity