In this article you will see, what is Times Interest Earned Ratio, the formula of TIE and a real example which shows how you can calculate this and how does it matters for your business or any startup?

So, let’s begin,

What is Times Interest Earned Ratio?
What is Times Interest Earned Ratio?

What is the times interest earned ratio?

The Times Interest Earned Ratio (TIE) is one of the tools from ratio analysis that shows, how easily a company can pay its interest or debt obligations on the basis of its current earnings. The times interest earned ratio is also known as the Interest Coverage Ratio.

Also, this ratio is one of the decisive parameters for the investors or financial institutes to check the credibility of the business before giving the loans or invest money in a particular business.

It is quite easy to enumerate the TIE of your financials. Basically, the times interest ratio is the division of Earning Before Taxes & Interests (EBIT) and the total amount of interest payable.

More the times Interest Earned (TIE), the more comfortably and efficiently a company can pay its interest. And less TIE more the negative times interest earned.

Let’s understand the defined formula to calculate the time interest earned ratio;

The formula of Time Interest Earned

Formula Of TIE – Business Guide Blog

To calculate the time interest earned ratio you need only two figures from your P&L statement (profit & loss statement). These are,

  1. EBIT
  2. Total Interest Payable

Where:

EBIT = Net income + Income Taxes + Total Interest Exp.

Let’s take the real example to see how it can be calculated,

Example & calculation of TIE

Here we will take an example of Amazon.com to know how to calculate the TIE,

Income Statement / P&L Statement of Amazon.com of the FY 2018

Income Statement of Amazon
Income Statement of Amazon (Source: The Wall Street Journal)

To see the full income statement click here.

As per the income statement, the EBIT is $12,717 million (given in the 5th row) and the interest payable is $1,417 million (given in the 9th row). So, the calculation of time interest earned ratio of Amazon.com is,

 calculation of time interest earned ratio of Amazon.com
calculation of time interest earned ratio of Amazon.com – Business Guide Blog

So, the TIE ratio of Amazon says, this company can pay it’s interest expense 8.5 times from its earnings.

It is as simple as that!:)

But you may think, how the TIE / Coverage ratio is matters? or why should we give importance to this?

How Time Interest Earned Matters?

Of course, TIE matters a lot. Especially for those companies who are willing to raise or already raised the funds from debts or also from equity.

Suppose you are an investor and you have three options to invest,

  1. A company called ‘A‘ has TIE less than 1 (to be exact 0.80).
  2. A second company called ‘B‘ has TIE exactly 1.
  3. And a third company ‘C‘ has TIE more that 1.5.

So here is a question for you,

In which company you would like to invest from A/B/C?

The answer is: The pro-investor will prefer to invest in C from the given three.

Because,

Company A has TIE less than 1 so it can’t even pay its interest on the debt it has and somewhere it is losing its money.

Company B has TIE 1 so it has sufficient funds to pay its interest on the debt. So, company B is better than A but still, it’s not doing well. Because this company is able to pay only the interest, not the principal amount. So this company will get into trouble when the principal amount will be due.

But the company ‘C‘ has TIE more that 1.5. This means this company is doing well and it is playing more safely than A&B. Because this company is earning more than it’s interest payable. So it may able to pay it’s principal amount too when it will come to pay the principal amount.

Generally, the analysts or the investors consider that, if the company has TIE 3 or more than 3 then it is performing beyond the mark.

So, all in all, it mainly matters for the investors or for the financial institutions to judge the performance of your company.

Conclusion

So, Time Interest Earned ratio is nothing but an analytical term whos the ability of a company to pay back its loans or ultimately how profitable it is.

And as a suggestion to the business people, I will say, no matter the company has to or hasn’t to show their performance to any third party for any purpose, every CEO, entrepreneur or the initiator in the company should keep his control on this important parameter to keep the company’s financials healthy and safe.

Was this article helpful for you? (Please comment below Yes or No?)

Your comment will improve us to give more better experiance next time

Related Article:

Basics of Ratio Analysis that will help you to analyze your business

Analyzing the financial performance of your company can help you understand where you have improved and where you have deteriorated. And we can analyze the financial performance of any company with the help of Ratio Analysis. know more… 

Accounts Receivables Turnover Ratio With Formula

The accounts receivable turnover ratio belongs to an accounting computing system that is mainly used to measure a company’s success in accumulating its receivables or cash owed by customers. know more…

Basics of SWOT Analysis of business

SWOT analysis is a way of identifying the key characteristics which are the strengths, weaknesses, opportunities, and threats. know more…

Write A Comment

Pin It