timesinterestearned

Times Interest Earned (TIE), also known as the interest coverage ratio, is a financial metric used to assess a company’s ability to meet its interest payments on debt from its operating earnings. It is calculated as earnings before interest and taxes (EBIT) divided by interest expense for the same period. Some analyses use operating income in place of EBIT, but the standard form is EBIT divided by interest expense.

Interpretation and use: A higher TIE indicates a greater ability to cover interest obligations from current earnings, implying lower default risk in credit assessments. Common practice among lenders is to look for a TIE well above 2x or 3x, though appropriate benchmarks vary by industry and capital structure. The ratio is widely used in credit analysis, financial modeling, and risk assessment to gauge debt-servicing capacity.

Limitations: TIE does not account for principal repayments, changes in debt levels, or cash flow timing, and it ignores liquidity cushions. It relies on accounting figures that can be influenced by non-cash items, one-time charges, or aggressive earnings management. It also does not reflect variations in interest rates or debt maturities, and a high TIE can disguise other financial weaknesses if earnings are volatile or unsustainable.

Example: If a company has EBIT of $500,000 and interest expense of $125,000, the TIE is 4.0x, indicating earnings cover interest four times.

See also: interest coverage ratio, debt service coverage ratio, operating income.