What does the Times Interest Earned Ratio tell us?
The times interest earned (TIE) ratio is a measure of a company’s ability to meet its debt obligations based on its current income. The formula for a company’s TIE number is earnings before interest and taxes (EBIT) divided by the total interest payable on bonds and other debt.
Is times interest earned ratio better high or low?
A higher times interest earned ratio is favorable because it means that the company presents less of a risk to investors and creditors in terms of solvency. From an investor or creditor’s perspective, an organization that has a times interest earned ratio greater than 2.5 is considered an acceptable risk.
How do you interpret times interest earned ratio?
To calculate the times interest earned ratio, we simply take the operating income and divide it by the interest expense. For example, Company A’s TIE ratio in Year 0 is $100m divided by $25m, which comes out to 4.0x.
What does a times interest earned ratio of 10 times indicate?
Example. Thus, Joe’s Excellent Computer Repair has a times interest earned ratio of 10, which means that the company’s income is 10 times greater than its annual interest expense, and the company can afford the interest expense on this new loan.
What does a low times interest earned ratio Mean?
Earnings before interest and taxes ÷ Interest expense = Times interest earned. A ratio of less than one indicates that a business may not be in a position to pay its interest obligations, and so is more likely to default on its debt; a low ratio is also a strong indicator of impending bankruptcy.
What information does the times interest earned ratio provide to investors or creditors?
What information does the times interest earned ratio provide to investors or creditors? It provides the creditor with an indication of the ability of the debtor to pay the interest on its debts.
What is the main difference between the cash coverage ratio and the times interest earned ratio?
Times Interest Earned (Cash Basis) measures a company’s ability to make periodic interest payments on its debt. The main difference between the two ratios is that Times Interest Earned (Cash Basis) utilizes adjusted operating cash flow rather than earnings before interest and taxes (EBIT)
What is times interest earned ratio quizlet?
The times interest earned ratio is an indicator of a company’s ability to meet the interest payments on its debt. The times interest earned calculation is a corporation’s income before interest and income tax expense, divided by interest expense.
Why is the times interest earned ratio computed using income before income taxes?
Because interest payments reduce income tax expense, the ratio is computed using income before tax.
Is a High times interest earned ratio good?
Higher times interest earned ratio: A high times interest earned ratio indicates healthy profitability for companies. Companies with higher ratios can handle debt repayment without sapping their income streams. This bodes well for long-term solvency.
Can times interest earned ratio be negative?
Can you have a negative times interest earned ratio? If you’re reporting a net loss, your times interest earned ratio would be negative as well. However, if you have a net loss, the times interest earned ratio is probably not the best ratio to calculate for your business.
What is a good debt ratio?
In general, many investors look for a company to have a debt ratio between 0.3 and 0.6. From a pure risk perspective, debt ratios of 0.4 or lower are considered better, while a debt ratio of 0.6 or higher makes it more difficult to borrow money.