2017-03-29 00:00:00 Accounting & Bookkeeping English Learn what times interest earned is and why it's important for business. Also learn how to calculate it, and see an example. https://quickbooks.intuit.com/ca/resources/ca_qrc/uploads/2017/06/accountant-calculates-TIE.jpg https://quickbooks.intuit.com/ca/resources/finance-accounting/what-is-times-interest-earned/ What is Times Interest Earned (TIE)?

# What Is Times Interest Earned (TIE)?

Times interest earned (TIE) is one of the many financial calculations that measure a business’s ability to pay back its debts. This ratio, sometimes called the interest coverage ratio, measures the relative amount of a company’s earnings available for use on interest expenses in the future. While technically considered a coverage ratio, TIE often times serves as a solvency ratio when financial institutions use it to evaluate small businesses seeking loans.

## Calculating Times Interest Earned

You can use EBIT (earnings before interest and taxes) or EBITDA (earnings before interest, taxes, depreciation, and amortization) to calculate your small business’s TIE. Many businesses figure it both ways to get a better grasp on their particular financial situations. The formula for using either figure is: EBIT or EBITDA divided by Interest Expense equals your Times Interest Earned.

## Times Interest Earned Example

Assume a business’s latest income statement shows \$250,000 of earnings before interest and taxes, and its total income expense for the year is \$50,000. To calculate its TIE, divide the \$250,000 by \$50,000 for a TIE that totals 5. This means that the business makes enough to cover its interest expenses five times over, which points to it having financial stability.

## Reasons for Calculating TIE

Your small business needs to calculate its TIE, because a lower number can signal that you operate at a risky level. This means you have trouble generating enough earnings to cover your debt servicing and may be extremely vulnerable to interest rate increases that increase your loan payments. Also, if you seek bank loans to raise more capital, financial institutions look at your TIE value when deciding whether to lend your small business money. Higher TIE numbers suggest your company has the ability to pay off its debt, which boosts your chances for loan acceptance.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.
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