Times Interest Earned (TIE)
Definition of 'Times Interest Earned (TIE)'
TIE, short for Times Interest Earned, is a ratio used to indicate a company’s ability to honor its debt obligations. The higher the TIE ratio, the more earnings it is able to devote to paying down debt. Conversely, lower TIE ratios—hovering somewhere around 1, 2, or 3—the less revenue it can devote to covering even the interest on those debts. To calculate the TIE ratio, divide the company’s earnings before interest, taxes, depreciation, and amortization (EBITDA) by its interest charges.
TheStreet Explains ‘Times Interest Earned (TIE)’
As an accounting tool, the TIE ratio is an easy way to cut through a company’s balance sheet to see what its able to do with its revenue rather than just how much revenue it takes in relative to its expenses. To that end, TIE is also referred to as the “interest coverage ratio.” If ACME, Inc., has an EBITDA of $25 million and $5 million in interest charges, its TIE ratio would be 5 (25 million / 5 million). Even without doing the calculation, it would be clear that ACME is clearly bringing in five times more money than it owes. But, TIE is a convenient shorthand to assess individual companies or compare multiple companies in the same industry.
Debt-Service Coverage Ratio (DSCR), calculated by dividing net operating income by total debt service, is a related concept to TIE. Both are what are known as “coverage ratios” and both are employed by lenders to size up the risks involved with lending money to individual companies. If ACME, Inc., for instance, took in only $6 million (and still had $5 million in interest charges), its TIE would be 1.2, which would be a red flag to lenders that the company may go bankrupt—effectively imperiling the lender’s ability to collect on the debt.
Terms Related to 'Times Interest Earned (TIE)':
Debt Service Coverage Ratio (DSCR) is a measure of available cash f...
EBITDA stands for earnings before interest, taxes, depreciation, an...
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By Brian Sozzi | 07/24/13 - 08:00 AM EDT