The Times Interest Earned Ratio and What It Measures

The TIE’s main purpose is to help quantify a company’s probability of default. This, in turn, helps determine relevant debt parameters such as the appropriate interest rate to be charged or the amount of debt that a company can safely take on. Is not authorised by the Dutch Central Bank to process payments or issue e-money. An application under Electronic Money regulations 2011 has been submitted and is in process. Enterprise value is a measure of a company’s total value, often used as a comprehensive alternative to equity market capitalization that includes debt. A high times interest earned ratio typically means a company has stronger performance and is less risky. Potential investors and existing shareholders must be conscious of the company’s debt burden.

As a result, the two ratios provide different insights into a company’s financial health. For this reason, it is generally advisable to use both ratios when assessing a company’s ability to pay its debts. Lenders will analyze the times interest earned times interest earned ratio ratio, among other solvency ratios, to determine how well the company can meet its long-term debt obligations. Looking at this ratio shows how well they can meet the current debt they hold while also having extra room for more business investments.

Analysis

In this case, ABC Company would have a times interest earned ratio of 3. Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent. I have no business relationship with any company whose stock is mentioned in this article. https://www.bookstime.com/ GoCardless is authorised by the Financial Conduct Authority under the Payment Services Regulations 2017, registration number , for the provision of payment services. In question, without factoring in any tax payments, interest, or other elements.

• The times interest earned ratio formula is expressed as income before interest and taxes, divided by the interest expense.
• This indicates that the bigger the ratio, the better the company’s financial position is.
• The purpose of the TIE ratio, also known as the interest coverage ratio , is to evaluate whether a business can pay the interest expense on its debt obligations in the next year.
• As a result, it will be easier to find the earnings before you find the EBIT or interest and taxes.
• The TIE’s main purpose is to help quantify a company’s probability of default.
• Investopedia requires writers to use primary sources to support their work.

Times-interest-earned is a kind of ratio that evaluates a business’s ability to pay interest expenses. A high coverage ratio indicates the easiness to pay interest and a low ratio indicates difficulty.

Times interest Earned Ratio

You can use the times interest earned ratio calculator below to quickly calculate your company’s ability to pay interest by entering the required numbers. The higher a company’s times interest earned ratio, the more cash it has to cover its debts and invest in the business.