# Times Interest Earned Ratio: What It Is and How to Calculate

> **Definition**
>
> The times interest earned ratio is a solvency ratio that indicates how well-positioned a company is to pay off the interest on its financial obligations using its current income.

## What Is the Times Interest Earned (TIE) Ratio?

The times interest earned (TIE) ratio measures a company’s ability to meet its interest obligations using its operating earnings. It is calculated by dividing [earnings before interest and taxes (EBIT)](https://www.investopedia.com/terms/e/ebit.asp) by the company’s total interest expense on outstanding debt.

A higher TIE ratio indicates that the business generates enough income to comfortably cover its interest payments, while a lower ratio may signal financial stress. Generally, a TIE ratio above 2.0 is considered a sign of solid financial health.  

### Key Takeaways

*   The TIE ratio shows how easily a company can pay the interest on its outstanding debt using current earnings.
*   TIE is calculated by dividing EBIT by interest expense.
*   A higher TIE indicates a greater ability to meet debt payments and invest in growth.
*   A low TIE may signal financial instability or a heavy debt burden.  
    

![Times Interest Earned Ratio](https://www.investopedia.com/thmb/yDty2lJZI6QxNHINLN0SwvC2dBs=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/TimesInterestEarnedRatio_updated-018b21772af3409aa049301343f70b7d.png)

*Solvency ratios, such as the times interest earned ratio, can tell you whether a company can pay off its long-term debts. — Investopedia / Julie Bang*

## Why the Times Interest Earned Ratio Matters

Solvency ratios like TIE help assess a company's ability to meet its [long-term debt](https://www.investopedia.com/terms/l/longtermdebt.asp) obligations. The TIE ratio, in particular, shows whether a firm generates enough earnings to comfortably cover its interest expenses.

Suppose XYZ Company has:

*   $10 million in existing debt at 4% interest
*   $10 million in new debt at 6% interest
*   EBIT of $3 million

Its annual interest expense is:  
(4% × $10 million) + (6% × $10 million) = $1 million

TIE = $3 million ÷ $1 million = 3.0

This means that the TIE ratio for XYZ Company is 3, or three times the annual interest expense.

## What the TIE Ratio Can Tell You

Obviously, no company needs to cover its debts several times over in order to survive. However, the TIE ratio is an indication of a [company's relative freedom from](https://www.investopedia.com/ask/answers/030615/what-does-high-times-interest-earned-ratio-signify-regard-companys-future.asp) the constraints of debt. Generating enough cash flow to continue to invest in the business is better than merely having enough money to stave off [bankruptcy](https://www.investopedia.com/terms/b/bankruptcy.asp).

A company's capitalization is the amount of money it has raised by issuing stock or debt, and those choices impact its TIE ratio. Businesses consider the [cost of capital](https://www.investopedia.com/terms/c/costofcapital.asp) for stock and debt and use that cost to make decisions.  

> **Important**
>
> Companies that have consistent earnings, like utilities, tend to borrow more because they are good credit risks.

## Special Considerations

As a rule, companies that generate consistent annual earnings are likely to [carry more debt](https://www.investopedia.com/articles/pf/13/business-financing-primer.asp) as a percentage of total capitalization. If a lender sees a history of generating consistent earnings, the firm will be considered a better credit risk.

For example:

*   Utility companies generate consistent earnings. Their product is not an optional expense for consumers or businesses. Some utility companies raise a considerable percentage of their [capital](https://www.investopedia.com/terms/c/capital.asp) by issuing debt.
*   Startup firms and businesses that have inconsistent earnings, on the other hand, raise most or all of the capital they use by issuing [stock](https://www.investopedia.com/ask/answers/difference-between-shares-and-stocks/).

Once a company establishes a track record of producing reliable earnings, it may begin raising capital through debt offerings as well.

## What Does a Times Interest Earned Ratio of 0.90 to 1 Mean?

The times interest earned ratio shows how many times a company can pay off its debt charges with its earnings. If a company has a ratio between 0.90 and 1, it means that its earnings are not able to pay off its debt and that its earnings are less than its interest expenses.

## Is Times Interest Earned a Profitability Ratio?

No, times interest earned is not a [profitability ratio](https://www.investopedia.com/terms/p/profitabilityratios.asp). It is a [solvency ratio](https://www.investopedia.com/terms/s/solvencyratio.asp). The ratio does not seek to determine how profitable a company is, but rather its capability to pay off its debt and remain financially solvent. If a company can no longer make interest payments on its debt, it is most likely not solvent.

## How Can a Company Improve Its Times Interest Earned Ratio?

To improve its times interest earned ratio, a company can increase earnings, reduce expenses, pay off debt, and refinance current debt at lower rates.

## The Bottom Line

The times interest earned (TIE) ratio evaluates a company’s ability to meet its debt obligations using its [operating income](https://www.investopedia.com/terms/o/operatingincome.asp). While no company needs to cover its interest expense multiple times to survive, a higher TIE ratio signals financial strength and flexibility.

Investors and analysts use TIE alongside other financial ratios to assess the overall health and [creditworthiness](https://www.investopedia.com/terms/c/credit-worthiness.asp) of a business. A company with a strong TIE ratio is better positioned to invest in growth while maintaining financial stability.

> **Article Sources**
>
> 1.  Rho. "[Times Interest Earned Interest Ratio: Formula, Definition, and Analysis](https://www.rho.co/blog/times-interest-earned-ratio)."