The times interest earned calculator calculates the times interest earned (TIE) ratio. The ratio is a financial metric that measures the ability of a business to pay its interest obligations on outstanding debt.
Additionally the ratio is referred to as the interest coverage ratio.
Using the Times Interest Earned Calculator
The Excel times interest earned calculator is available for download below. The calculator calculates the TIE ratio using the earnings before interest and tax (EBIT), and interest expense.
The calculator is used as follows.
- The earnings before interest and tax is entered. Earnings before interest and tax (EBIT) is found on the income statement of the business. It is sometimes referred to as profit before interest and tax (PBIT).
- The interest expense is entered. The interest expense is also found on the income statement of the business and represents the amount of interest charged on borrowings for the year.
- The TIE ratio is calculated. The times interest earned calculator calculates the TIE ratio.
Understanding the TIE ratio
The ratio is calculated by dividing a business’s earnings before interest and taxes (EBIT) by it’s interest expense. The calculator uses the following formula.
TIE Ratio = EBIT / Interest Expense
Earnings before interest and tax (EBIT) is the income left after the business has paid it’s operating expenses. Both EBIT and the interest expense are shown on the income statement of the business.
The results from the TIE calculator can be interpreted as follows.
- A TIE ratio of 1 indicates that the earnings are just enough to cover its interest expense.
- A TIE ratio of less than 1 indicates that the business is not generating enough earnings to cover its interest expense and may have difficulty paying its debts. If the times interest earned cover falls too low, the business may be deemed to be a high risk by lenders and as such may find it’s borrowing facilities reduced or even withdrawn.
- In contrast, a TIE ratio of greater than 1 indicates that the business is generating enough earnings to cover its interest expense and is likely to be able to meet its debt obligations
There is no correct value for the times interest earned ratio as it depends on the industry in which the business operates. It is useful to compare the calculated figure with other businesses in your industry using figures available from published financial statements. The times interest ratio should always be higher than 1 otherwise the business is not generating enough income to meet its interest obligations.
Times Interest Earned Calculator Download
The times interest earned spreadsheet calculator is available for download in Excel format by following the link below.
Users use this TIE ratio calculator at their own risk. We make no warranty or representation as to its accuracy. Additionally we are covered by the terms of our legal disclaimer, which you are deemed to have read. This is an example of a tool that you might use to show how to calculate times interest earned. It is purely illustrative. This is not intended to reflect general standards or targets for any particular business, company or sector. If you do spot a mistake in the times interest earned calculator, please let us know and we will try to fix it.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.