Times Interest Earned Calculator

Times Interest Earned (TIE) ratio measures a company's ability to pay interest on its debt. Formula: TIE = EBIT / Interest Expense, where EBIT is Earnings Before Interest and Taxes (operating income). A TIE of 5 means you earn 5 times the amount needed to pay interest. Higher ratios indicate lower default risk and better ability to service debt. Also called Interest Coverage Ratio.

Good TIE varies by industry and risk tolerance: 5+ is excellent (very safe, low default risk), 3-5 is good (comfortable coverage), 2-3 is adequate (acceptable but monitor closely), 1-2 is risky (tight coverage, vulnerable to downturns), Below 1 is dangerous (cannot cover interest from operations). Lenders typically want 2.5+ minimum. Capital-intensive industries (utilities, telecom) may operate at 1.5-3, while stable businesses should target 4+.

TIE measures only INTEREST coverage: EBIT / Interest Expense. Debt Service Coverage Ratio (DSCR) measures coverage of ALL debt payments (interest + principal): EBIT / Total Debt Payments. TIE is easier to calculate and focuses on immediate payment obligations. DSCR is more comprehensive. Example: $500K EBIT, $100K interest, $200K principal → TIE = 5.0*, DSCR = 1.67*. DSCR is more stringent and realistic for lenders.

Improve TIE by: 1) Increase EBIT: Grow revenue, reduce operating expenses, improve margins. 2) Reduce interest expense: Pay down debt, refinance at lower rates, negotiate better terms. 3) Restructure debt: Convert to equity, extend maturity (reduce annual payments). 4) Avoid new debt: Use cash flow or equity for growth. Example: Increasing EBIT from $500K to $600K with $100K interest improves TIE from 5* to 6*. Focus on sustainable EBIT growth.

Lenders use TIE to assess default risk and repayment ability: 1) Higher TIE = more cushion if earnings decline, 2) Shows ability to handle debt even in downturns, 3) Indicates financial stability and management quality, 4) Determines loan terms and interest rates. Low TIE (below 2-3) may result in: Loan denial, higher interest rates, stricter covenants, collateral requirements. Lenders often require minimum TIE covenants (e.g., maintain 3.0* TIE).

TIE limitations: 1) Uses EBIT not cash flow - non-cash items (depreciation) inflate EBIT but can't pay interest. 2) Ignores principal payments - only measures interest coverage. 3) Backward-looking - based on past earnings not future. 4) Doesn't account for working capital needs. 5) Can be manipulated with accounting choices. Use alongside: Cash flow coverage, DSCR, debt-to-equity ratio, and cash position for complete debt analysis.