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Definition: Times Interest Earned (TIE)
Times interest earned is defined as the measure for a firm’s capability to service its debt obligations. It is calculated as a ratio of firm’s EBIT to the total interest payable on bond and other debt obligations (EBIT of a firm is the earnings before interest and taxes). Both the numerator and the denominator are taken from the income statement. TIE is a solvency ratio.
TIE is also known as the Interest Coverage Ratio. A higher value of TIE indicates that the firm is generating sufficient funds for periodic debt payments to the borrowers. A lower value of TIE may result in higher interest rates from the lenders or difficulty in raising funds for operations. Generally a value of 2 or above is considered adequate while a value less than 1 means that the firm may not be capable of servicing its debt. Also, a very high value of TIE indicates that the firm is not taking advantage of the debt capital that might be available to it.
For example, if a firm’s EBIT is $500,000 and the Interest charges are $300,000. Then,