Times Interest Earned (TIE) ratio measures a company's ability to meet its debt obligations based on its operating income. It is calculated by dividing earnings before interest and taxes (EBIT) by the interest expense.
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The TIE ratio provides insight into a company's financial stability and its capacity to pay interest on outstanding debt.
A higher TIE ratio indicates stronger financial health and a greater ability to cover interest payments.
The formula for calculating the TIE ratio is EBIT divided by interest expense.
A TIE ratio below 1 suggests that a company does not generate enough operating income to cover its interest expenses, indicating potential solvency issues.
The TIE ratio is particularly useful for creditors and investors to assess the risk of lending to or investing in a company.
Review Questions
How is the Times Interest Earned (TIE) ratio calculated?
What does a higher TIE ratio indicate about a company's financial health?
Why might creditors be interested in a company's TIE ratio?
Related terms
Debt-to-Equity Ratio: Measures the proportion of debt financing relative to equity financing in a company.
Current Ratio: Assesses a company's ability to pay short-term obligations with its current assets.
Operating Income: Also known as EBIT, it represents earnings generated from normal business operations.
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