Times Interest Earned - TIE

Times Interest Earned - TIE

A metric used to measure the ability of a company to meet its debt obligations. It is calculated by taking a company's earnings before interest and taxes (EBIT) and dividing by the total interest payable on bonds and other contractual debt. It is usually quoted as a ratio and indicates how many times a company can cover it's interest charges on a pretax basis since failure to meet these obligations could force a company into bankruptcy.

Times Interest Earned = EBIT / Total Interest

Notes:

Ensuring interest payments to debt holders and preventing bankruptcy depends mainly on a company's ability to sustain earnings. However, a high ratio can indicate that a company has an undesirable lack of debt or is paying down too much debt with earnings that could be used for other projects. The rational is that companies would yield greater returns by investing their earnings into other projects and borrowing, at a lower cost of capital than what it is currently paying for it's current debt, to meet it's debt obligations.

Also referred to as "interest coverage ratio" and "fixed-charged coverage".

See also: Cost of Capital, Debt-Service Ratio, Credit Risk, EBIT, Paydown