Finance

Times Interest Earned Ratio Calculator

Calculate the times interest earned ratio (TIE) to measure a company's ability to meet its debt obligations.

$
$
Times interest earned
5x
Very low risk
EBIT
$500,000
Interest expense
$100,000
TIE ratio
5x
Risk assessment
Very low risk

TIE Ratio Benchmarks

< 1.0x
Cannot cover interest
1.0x - 1.5x
Very risky
1.5x - 2.5x
Moderate risk
2.5x - 5.0x
Low risk
> 5.0x
Very low risk

What Is the Times Interest Earned Ratio?

The times interest earned (TIE) ratio, also known as the interest coverage ratio, measures a company's ability to meet its debt obligations. It shows how many times a company can cover its interest payments with its operating earnings.

The Formula

TIE Ratio=EBITInterest Expense\text{TIE Ratio} = \frac{\text{EBIT}}{\text{Interest Expense}}

Where:

  • EBIT = Earnings Before Interest and Taxes (operating income)
  • Interest Expense = Total interest payments on debt

Interpreting the Ratio

  • TIE < 1: The company cannot cover its interest payments with operating income
  • TIE 1-2: Risky; limited ability to cover interest
  • TIE 2-5: Moderate coverage; generally acceptable
  • TIE > 5: Strong coverage; low default risk

Example Calculation

A company with:

  • EBIT: $500,000
  • Interest expense: $100,000
TIE=500,000100,000=5.0x\text{TIE} = \frac{500{,}000}{100{,}000} = 5.0x

This company can cover its interest payments 5 times over with its operating earnings.

Limitations

The TIE ratio:

  • Uses EBIT, not actual cash flow
  • Doesn't account for principal repayments
  • May vary by industry
  • Should be compared to industry benchmarks

Industry Variations

Different industries have different typical TIE ratios:

  • Utilities: Lower ratios acceptable due to stable cash flows
  • Technology: Higher ratios expected due to volatile earnings
  • Real Estate: Lower ratios common due to high leverage