Times interest earned

From Wikipedia, the free encyclopedia - View original article

Jump to: navigation, search

Times interest earned (TIE) or interest coverage ratio is a measure of a company's ability to honor its debt payments. It may be calculated as either EBIT or EBITDA divided by the total interest payable.

\mbox{Times-Interest-Earned} = \frac {\mbox{EBIT or EBITDA}} {\mbox{Interest Charges}}

Interest Charges = Traditionally "charges" refers to interest expense found on the income statement.

Times Interest Earned or Interest Coverage is a great tool when measuring a company's ability to meet its debt obligations. When the interest coverage ratio is smaller than 1, the company is not generating enough cash from its operations EBIT to meet its interest obligations. The Company would then have to either use cash on hand to make up the difference or borrow funds. Typically, it is a warning sign when interest coverage falls below 2.5x.

Times interest earned definition and explanation[edit]

The times interest earned ratio indicates the extent of which earnings are available to meet interest payments.

A lower times interest earned ratio means less earnings are available to meet interest payments and that the business is more vulnerable to increases in interest rates.

The times interest earned ratio is included in the financial statement ratio analysis spreadsheets highlighted in the left column, which provide formulas, definitions, calculation, charts and explanations of each ratio.

The times interest earned ratio is listed in our profitability ratios.

See also[edit]

EBITDA considered to be a better measure of Interest Coverage ratio.

External links[edit]