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Times interest earned, or TIE, measures a company’s ability to pay its debts.

It’s calculated by dividing a company’s earnings before interest and taxes by the interest that’s payable on its debts. A low ratio means the company struggles to pay debts and may face bankruptcy if it fails to meet its obligations. A high ratio means the company can cover its debt expenses, which is a trait lenders and bondholders like to see.

Suppose ABC Corporation has a net income of $1 million with interest expenses totaling $200,000, and it owes taxes totaling $300,000. Its TIE ratio is 7.5. ABC’s income is 7.5 times greater than its annual interest expense, so it can pay its interest expense 7-and-a-half times over.

While a company with a high TIE ratio is considered less of a risk, there can be instances when the ratio is deemed too high. There could be times a company is using its earnings to pay down too much debt, when instead it could be leveraging those earnings for other projects that would generate additional income.

As with most financial ratios, comparisons using the TIE ratio should be made only among companies within the same industry.

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