1. What is Times Interest Earned Ratio?

The Times Interest Earned (TIE) ratio measures a company's ability to meet its debt obligations based on its current income. It compares a company's earnings before interest and taxes (EBIT) to its interest expenses.

2. How Does the Calculator Work?

The calculator uses the Times Interest Earned formula:

Where:

• \( EBIT \) — Earnings Before Interest and Taxes (currency)
• \( Interest\ Expense \) — Total interest payments due (currency)

Explanation: The ratio shows how many times a company can cover its interest payments with its current earnings.

3. Importance of Times Interest Earned Ratio

Details: A higher ratio indicates better financial health and lower risk of default. Lenders and investors use this metric to assess creditworthiness.

4. Using the Calculator

Tips: Enter EBIT and Interest Expense in the same currency (e.g., dollars). Both values must be positive, with interest expense greater than zero.

5. Frequently Asked Questions (FAQ)

Q1: What is a good Times Interest Earned ratio?
A: Generally, a ratio of 2.5 or higher is considered acceptable, while 3-4 or higher is preferred. However, this varies by industry.

Q2: Can the ratio be negative?
A: No, if EBIT is negative, the ratio doesn't provide meaningful information about debt coverage.

Q3: How is this different from debt service coverage ratio?
A: DSCR considers principal payments and uses operating income rather than EBIT, making it more comprehensive.

Q4: What are limitations of this ratio?
A: It doesn't account for principal repayments or variability in earnings. It's best used with other financial metrics.

Q5: How often should this ratio be calculated?
A: Typically calculated quarterly with financial statements, or when assessing new debt obligations.