What It Is, How to Calculate TIE [Video]

The times interest earned (TIE) ratio is a solvency ratio that determines how well a company can pay the interest on its business debts. It 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. The result is a number that shows how many times a company could cover its interest charges with its pretax earnings. TIE is also referred to as the interest coverage ratio.

Assume, for example, that XYZ Company has $10 million in 4% debt outstanding and $10 million in common stock. The company needs to raise more capital to purchase equipment. The cost of capital for issuing more debt is an annual interest rate of 6%. The company’s shareholdersexpect an annual dividend payment of 8% plus growth in the stock …