Times Interest Earned (TIE) – The bigger the numerical ratio the better; (a ratio < 2.5 concerns analysts) However, high ratios can indicate paying off too much debt (in this case, the earnings could be used to fund other projects).
This is one of the Leverage Ratios which shows the risk a company takes in using debt capital to finance asset purchases.
Calculate this ratio using the below equation. Values in the equation can be acquired from the Income Statement.
Equation:
Times Interest Earned = (Operating Income) ÷ (Interest)
Equation results indicate whether a company is generating enough income to make its interest payments.
Note: When companies issue bonds, analysts calculate this ratio annually to determine the company’s ability to make their interest payment.