what does times interest earned ratio mean

The ratio could be higher, but this does not indicate the Company has actual cash to pay the interest expense. Barbara is currently a financial writer working with successful B2B businesses, including SaaS companies. She is a former CFO for fast-growing tech companies and has Deloitte audit experience. Barbara has an MBA degree from The University of Texas and an active CPA license. When she’s not writing, Barbara likes to research public companies and play social games including Texas hold ‘em poker, bridge, and Mah Jongg.

  • That means that, in 2018, Harold was able to repay his interest expense more than 100 times over.
  • When you sit down with the financial planner to determine your TIE ratio, they plug your EBIT and your interest expense into the TIE formula.
  • Gain in-demand industry knowledge and hands-on practice that will help you stand out from the competition and become a world-class financial analyst.
  • The total balance on those credit cards is $50,000 with an annual interest rate of 20 percent.

Total-debt-to-total-assets is a leverage ratio that shows the total amount of debt a company has relative to its assets. Like other ratios, there are a number of limitations to consider when using the times interest earned ratio. For example, if Pebble Golf Course had EBIT of $100 and interest expense of $20, the times interest earned ratio would be 5.0 or 5x. The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.

Times Interest Earned

TIE ratios are an indicator of the long-term financial strength of an organization. The TIE ratio is helpful for comparing two different companies in terms of how financially stable they are. Factoring with altLINE gets you the working capital you need to keep growing your business. Companies are rarely equal, however, and comparisons between industries, companies, and time periods may be misleading. The Times Interest Earned Ratio is an indication of a company’s overall financial health. We note from the above chart that Volvo’s Times Interest Earned has been steadily increasing over the years.

Consequently, creditors or investors who look at your income statement will be more than happy to lend to a business that has been consistently making enough money over a long period of time. Times Interest Earned ratio is the measure of a company’s ability to meet debt obligations, based on its current income. A company’s times interest ratio indicates how well it can pay its debts while still investing in itself for growth. A higher ratio suggests to investors that an investment in the company is relatively low risk.

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Here’s everything you need to know about the Times Interest Earned ratio, which includes how to calculate it and what it means for your business. See what resources altLINE has to offer, including interactive calculators, articles, and news. See how bankers, brokers, and financial advisors can partner with altLINE as a part of our referral program.

  • However, because one company is younger and is in a riskier industry, its debt may be assessed a rate twice as high.
  • If you’re reporting a net loss, your times interest earned ratio would be negative as well.
  • The interpretation is that the company is within its debt capacity with a low risk of not paying interest on its debt.
  • The fixed-charge coverage ratio indicates a firm’s capacity to satisfy fixed charges, such as debt payments, insurance premiums, and equipment leases.
  • One of them is the company’s decision to either incur debt or issue the stock for capitalization purposes.
  • The ratio is calculated by dividing total sales by average total assets.

Lenders also use times interest expense ratio when evaluating credit decisions. A company’s executives may compare its times interest ratio to similar companies in the same business to see how well they are doing. Ask a financial advisor for assistance evaluating the strength of companies you might like to include in your portfolio.

How to calculate the times interest earned ratio?

It is an indicator to tell if a company is running into financial trouble. A high ratio means that a company is able to meet its interest obligations because earnings are significantly greater than annual interest obligations. The metric uses interest payments because they are what does times interest earned ratio mean long-term fixed expenses. Therefore, if your company finds it difficult to pay fixed expenses such as interest, you could be at risk of bankruptcy. As such, the times interest ratio shows that you may need to pay off existing debt obligations before assuming additional debt.

what does times interest earned ratio mean

The times interest earned ratio is calculated by dividing the company’s earnings before interest and taxes by its interest expense. The times interest earned ratio is a calculation that measures a company’s ability to pay its interest expenses. Times Interest Earned ratio measures a company’s ability to honor its debt payments. This means that Tim’s income is 10 times greater than his annual interest expense. In this respect, Tim’s business is less risky and the bank shouldn’t have a problem accepting his loan.

What does a high times interest earned ratio indicate?

Times Interest Earned Ratio Definition

A higher ratio indicates less risk to investors and lenders, while a lower times interest ratio suggests that the company may be generating insufficient earnings to pay its debts while also re-investing in itself.

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