What is Times Interest Earned?

Times interest earned (TIE) is used to measure if a company can pay up its debts or not. This calculates the number of times a company can pay up its interest charges before the deductions of tax. It is basically calculated by estimating the earnings of a company before its interest and tax rates (EBIT). This is then divided by the total interest to be paid on bonds and other contractual debt.

How does Times Interest Earned Work?

Times Interest Earned can also be referred to as an interest coverage ratio. Whenever a company fails to meet up with its debt obligations, then bankruptcy is inevitable. To avoid bankruptcy, a company needs to generate much earnings so as to meet up with its debts. These earnings are generated through stocks, debts, and others. All of these contribute to the TIE Ratio and referred to as Capitalization factors. These factors affect the TIE Ratio.

How to Calculate Times Interest Earned (TIE)

For example, a company with $10 million in 4% debt to be paid and $10 million in stocks. And the company saw a vital need to purchase equipment but with more capital. The cost of capital for more debt is an annual interest rate of 6% and shareholders expect an annual dividend payment of 8%, plus the appreciation in the stock price of the company. This is calculated as (4% X $10 million) + (6% X $10 million), or $1 million annually. At the end, the company's Earnings Before Interest and Taxes calculation is $3 million, which means that the TIE is 3, or three times the annual interest expense. This the amount paid on interest.

Factoring in Consistent Earnings

A company can raise capital through debt offerings rather than issuing stocks in as much as the company has a record of maintaining annual regular earnings. Companies that generate regular earnings are more attractive to lenders. Reasons because they will be able to pay interest on time. Hence, these companies will have more debts. A good example is the Utility company, they will be able to raise 60% or more of their capital from issuing debt. On the other hand, businesses that have irregular annual earnings try to use stock to raise capital.

Related Topics

• Trend Analysis of Financial Statements
• Common-Size Analysis (Vertical Analysis) of Financial Statements
• Common-Size Financial Statement
• Net Dollar Retention
• Horizontal Analysis
• Per Share Basis
• Profitability Ratios
• Gross Margin Ratio
• Profit Margin
• After Tax Profit Margin
• Return on Assets
• Total Shareholder Return
• Cash on Cash Return
• Earnings Per Share
• Diluted Earnings Per Share
• Asset Turnover Ratio
• Berry Ratio
• Break-Even Analysis
• Liquidity Ratio
• Current ratio  (Working Capital Ratio)
• Working Ratio
• Quick Ratio
• Quick Assets
• Days Sales Outstanding
• Cash Ratio (Operating Cash Flow Ratio)
• Receivables turnover ratio (often converted to average collection period)
• Accounts Payable Turnover Ratio
• Inventory turnover ratio (often converted to average sale period)
• Solvency (Coverage Ratios)
• Leverage Ratio (Debt Ratio)
• Asset Coverage Ratio
• Debt to Equity
• Debt to Income Ratio
• Debt Coverage Ratio
• Times Interest Earned
• Market Capitalization
• Price to Equity Ratio
• Book-To-Market Ratio
• Price to Earnings Ratio
• Price to Earnings Growth (PEG) Ratio
• Price to Earnings Growth Payback Ratio
• CAPE Ratio
• Price to Cash Flow Ratio
• Capital Maintenance
• Book to Bill Ratio
• Asset Turnover Ratio
• Plowback Ratio 
• Days Inventory Outstanding
• Days Payable Outstanding
• Days Sales Outstanding
• Non-financial Performance Measures: The Balance Scorecard