Times Interest Earned

times interest earned

See interest coverage.

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Times Interest Earned

A measure of a company's ability to service its debts. It is calculated by dividing the company's earnings before interest and taxes by the total interest payable on its debts, expressed as a ratio. Investors prefer publicly-traded companies to have a middling times-interest-earned ratio. A low ratio indicates an inability to service debts, while too high a ratio indicates a lack of debt that investors may find undesirable.

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Times Interest Earned (TIE)

What Does Times Interest Earned (TIE) Mean?

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

Investopedia explains Times Interest Earned (TIE)

Ensuring interest payments to debtholders and preventing bankruptcy depend mainly on a company's ability to sustain earnings. However, a high TIE 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 rationale behind TIE is to determine whether there are other projects that yield greater returns than existing ones or whether current borrowing costs (interest rates) should be reduced in exchange for lower borrowing costs.

Related Terms:
• Cash Conversion Cycle—CCC
• Cost of Capital
• Credit Rating
• Earnings before Interest, Taxes, Depreciation, and Amortization—EBITDA
• Interest Rate