Times Interest Earned (TIE) is also known as the interest coverage ratio, is a cash-flow analysis that compares the pre-tax earnings of a company to the total amount of interest payable on their debt obligations.
A healthy ratio indicates that a company will probably not default on loan repayments. To compute this ratio, divide a company’s annual income before taxes by their annual interest payments on debt obligations. This ratio is not concerned with the actual principal due on loans since the principal amount is already pegged to some of the assets on the books of the company, and other fundamental equations will already factor that in.
By looking at only the interest due annually in relation to the annual pretax revenue of the company, an investor gets an idea of how insulated a company is from default risk. A larger ratio number indicates that a company is capable of paying its debt interest obligations, even if its annual earnings decrease in the future.
EBIT or EBITDA can be used for this ratio.
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