The times interest earned ratio—commonly known as the TIE ratio or interest coverage ratio—compares a company’s earnings before interest and taxes ([EBIT](https://www.masterclass.com/articles/ebit-explained)) to its total interest expenses. TIE ratios appear on financial statements to illustrate how much of a company’s income goes toward servicing long-term debt.

If a company’s operating income cannot cover its annual interest expenses, it may mean the business is a credit risk that could default on future debt payments. When [balance sheets](https://www.masterclass.com/articles/what-is-a-balance-sheet) show that a company can meet its debt obligations using its normal [cash flow](https://www.masterclass.com/articles/cash-flow), it speaks well of the company’s ability to remain in business.
As financial ratios go, the TIE ratio is relatively simple to calculate. The ratio formula is:

*Times Interest Earned Ratio = Earnings Before Interest and Taxes / Total Interest Expenses*

A business’s [earnings before interest and taxes, or EBIT](https://www.masterclass.com/articles/ebit-explained), represents the net income after salaries and short-term liabilities are paid off but before interest payments and taxes are paid. It’s possible for a company's times interest earned ratio to fluctuate from one financial reporting period to the next because a company's income may fluctuate from one <a href='https://masterclass.com/articles/how-to-read-and-understand-an-income-statement' target='_blank' class='mc-text--link' data-mc-segment-trigger='true' data-mc-segment-event-type='Article Page Click' data-event-obj='{"textTag":"p","href":"https://masterclass.com/articles/how-to-read-and-understand-an-income-statement","linkCopy":"income statement","category":"automated-link"}' automatic='true'>income statement</a> to the next. What's more, a lender's [interest rates](https://www.masterclass.com/articles/what-are-interest-rates) can rise and fall with market conditions, and these fluctuating interest charges can also cause the TIE ratio to change.
The times interest earned ratio can provide a measure of a company’s overall solvency. Investment bankers and lenders use the TIE ratio (and other solvency ratios) to determine whether a company can use its current income to shoulder additional debt or whether it needs to quickly ramp up profits and improve [liquidity](https://www.masterclass.com/articles/what-is-liquidity-explained).
Many investors look for a TIE ratio greater than 2.5. A TIE ratio of 2.5 means that a company’s earnings exceed their interest expenses by two and a half times. A rate lower than 2.5 could indicate that the company has overextended.
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](https://www.masterclass.com/articles/solvency-ratio-explained). If a company’s TIE ratio is very high, however, it may indicate that the company has not invested much in growth.
If a company’s EBIT and total interest expenses are of identical amounts, its times interest earned ratio will equal one. This means the company’s net income (before taxes and regular interest payments) just barely meets the minimum threshold for covering future interest expenses. Any debt ratio value below one means that future debt obligations exceed a company’s earnings. This can be an ominous sign for future solvency.
A low or negative TIE ratio indicates that debt service may be taking up too much of a company’s operating expenses. If debt payments continually exceed revenue, a company risks missing essential payments on items like salaries, [accounts payable](https://www.masterclass.com/articles/what-is-accounts-payable), and income tax. While debt is not an inherently bad thing for a growing business, it must eventually dip below the amount of revenue a company brings in.
[MasterClass at Work](https://www.masterclass.com/for-business) is the learning platform to help unlock the full potential of your employees and inspire a learning lifestyle in everyone. From negotiation to mindfulness to baking—these are just a few things your teams can explore.
The times interest earned ratio compares a company’s earnings before interest and taxes to its total interest expenses. Learn more about how to calculate and interpret the times interest earned ratio.

The times interest earned ratio compares a company’s earnings before interest and taxes to its total interest expenses. Learn more about how to calculate and interpret the times interest earned ratio.

Times Interest Earned Ratio: How to Calculate TIE Ratio

The times interest earned ratio—commonly known as the TIE ratio or interest coverage ratio—compares a company’s earnings before interest and taxes (<a href='https://www.masterclass.com/articles/ebit-explained' target='_self' class='mc-text--link' data-mc-segment-trigger='true' data-mc-segment-event-type='Article Page Click' data-event-obj='{"textTag":"p","href":"https://www.masterclass.com/articles/ebit-explained","linkCopy":"EBIT","category":null}'>EBIT</a>) to its total interest expenses. TIE ratios appear on financial statements to illustrate how much of a company’s income goes toward servicing long-term debt.If a company’s operating income cannot cover its annual interest expenses, it may mean the business is a credit risk that could default on future debt payments. When <a href='https://www.masterclass.com/articles/what-is-a-balance-sheet' target='_self' class='mc-text--link' data-mc-segment-trigger='true' data-mc-segment-event-type='Article Page Click' data-event-obj='{"textTag":"p","href":"https://www.masterclass.com/articles/what-is-a-balance-sheet","linkCopy":"balance sheets","category":null}'>balance sheets</a> show that a company can meet its debt obligations using its normal <a href='https://www.masterclass.com/articles/cash-flow' target='_self' class='mc-text--link' data-mc-segment-trigger='true' data-mc-segment-event-type='Article Page Click' data-event-obj='{"textTag":"p","href":"https://www.masterclass.com/articles/cash-flow","linkCopy":"cash flow","category":null}'>cash flow</a>, it speaks well of the company’s ability to remain in business.

What Is the Times Interest Earned Ratio?

As financial ratios go, the TIE ratio is relatively simple to calculate. The ratio formula is:Times Interest Earned Ratio = Earnings Before Interest and Taxes / Total Interest ExpensesA business’s <a href='https://www.masterclass.com/articles/ebit-explained' target='_self' class='mc-text--link' data-mc-segment-trigger='true' data-mc-segment-event-type='Article Page Click' data-event-obj='{"textTag":"p","href":"https://www.masterclass.com/articles/ebit-explained","linkCopy":"earnings before interest and taxes, or EBIT","category":null}'>earnings before interest and taxes, or EBIT</a>, represents the net income after salaries and short-term liabilities are paid off but before interest payments and taxes are paid. It’s possible for a company&#39;s times interest earned ratio to fluctuate from one financial reporting period to the next because a company&#39;s income may fluctuate from one <a href='https://masterclass.com/articles/how-to-read-and-understand-an-income-statement' target='_blank' class='mc-text--link' data-mc-segment-trigger='true' data-mc-segment-event-type='Article Page Click' data-event-obj='{"textTag":"p","href":"https://masterclass.com/articles/how-to-read-and-understand-an-income-statement","linkCopy":"income statement","category":"automated-link"}' automatic='true'>income statement</a> to the next. What&#39;s more, a lender&#39;s <a href='https://www.masterclass.com/articles/what-are-interest-rates' target='_self' class='mc-text--link' data-mc-segment-trigger='true' data-mc-segment-event-type='Article Page Click' data-event-obj='{"textTag":"p","href":"https://www.masterclass.com/articles/what-are-interest-rates","linkCopy":"interest rates","category":null}'>interest rates</a> can rise and fall with market conditions, and these fluctuating interest charges can also cause the TIE ratio to change.

How to Calculate Times Interest Earned Ratio

The times interest earned ratio can provide a measure of a company’s overall solvency. Investment bankers and lenders use the TIE ratio (and other solvency ratios) to determine whether a company can use its current income to shoulder additional debt or whether it needs to quickly ramp up profits and improve <a href='https://www.masterclass.com/articles/what-is-liquidity-explained' target='_self' class='mc-text--link' data-mc-segment-trigger='true' data-mc-segment-event-type='Article Page Click' data-event-obj='{"textTag":"p","href":"https://www.masterclass.com/articles/what-is-liquidity-explained","linkCopy":"liquidity","category":null}'>liquidity</a>.

How to Interpret a Times Interest Earned Ratio 

Many investors look for a TIE ratio greater than 2.5. A TIE ratio of 2.5 means that a company’s earnings exceed their interest expenses by two and a half times. A rate lower than 2.5 could indicate that the company has overextended.

What Is a Good TIE 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 <a href='https://www.masterclass.com/articles/solvency-ratio-explained' target='_self' class='mc-text--link' data-mc-segment-trigger='true' data-mc-segment-event-type='Article Page Click' data-event-obj='{"textTag":"p","href":"https://www.masterclass.com/articles/solvency-ratio-explained","linkCopy":"solvency","category":null}'>solvency</a>. If a company’s TIE ratio is very high, however, it may indicate that the company has not invested much in growth.

What Does a High TIE Ratio Tell You?

If a company’s EBIT and total interest expenses are of identical amounts, its times interest earned ratio will equal one. This means the company’s net income (before taxes and regular interest payments) just barely meets the minimum threshold for covering future interest expenses. Any debt ratio value below one means that future debt obligations exceed a company’s earnings. This can be an ominous sign for future solvency.

What Does a 1:1 Times Interest Earned Ratio Tell You?

A low or negative TIE ratio indicates that debt service may be taking up too much of a company’s operating expenses. If debt payments continually exceed revenue, a company risks missing essential payments on items like salaries, <a href='https://www.masterclass.com/articles/what-is-accounts-payable' target='_self' class='mc-text--link' data-mc-segment-trigger='true' data-mc-segment-event-type='Article Page Click' data-event-obj='{"textTag":"p","href":"https://www.masterclass.com/articles/what-is-accounts-payable","linkCopy":"accounts payable","category":null}'>accounts payable</a>, and income tax. While debt is not an inherently bad thing for a growing business, it must eventually dip below the amount of revenue a company brings in.

What Does a Lower Times Interest Earned Ratio Tell You?

<a href='https://www.masterclass.com/for-business' target='_self' class='mc-text--link' data-mc-segment-trigger='true' data-mc-segment-event-type='Article Page Click' data-event-obj='{"textTag":"p","href":"https://www.masterclass.com/for-business","linkCopy":"MasterClass at Work","category":null}'>MasterClass at Work</a> is the learning platform to help unlock the full potential of your employees and inspire a learning lifestyle in everyone. From negotiation to mindfulness to baking—these are just a few things your teams can explore.

MasterClass at Work

The times interest earned ratio compares a company’s earnings before interest and taxes to its total interest expenses. Learn more about how to calculate and interpret the times interest earned ratio.

The times interest earned ratio compares a company’s earnings before interest and taxes to its total interest expenses. Learn more about how to calculate and interpret the times interest earned ratio.
