What is times interest earned?

Times interest earned (TIE) evaluates the creditworthiness of a business. It’s a way of measuring a company’s ability to pay off the interest accruing on its loans, and is expressed as a ratio. For instance, if the ratio is 3.0, the company has enough income to pay its interest obligations three times over.

Where have you heard about times interest earned?

TIE helps investors appraise a company’s financial stability. Borrowing money is a necessity for most businesses to facilitate growth, but an inability to pay off the interest accrued on any loans is a red flag warning that insolvency may be on the horizon.

What you need to know about times interest earned.

To calculate TIE, you take earnings before interest and taxes and divide that figure by the total interest payable on bonds and other contractual debt.

Generally speaking, the higher the figure, the better equipped a company is to meet its interest payments. A very high ratio isn’t necessarily a good thing, however, as it might suggest a company has spent too much of its capital paying off debt with earnings that could have been used for other projects or investments to expand the business.

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Read our definition of debt ratio for more information on measuring company stability.