Times interest earned (TIE) is a metric used to measure a company’s manageable debt limits; by its ability to pay the monthly interest on it’s debts.
TIE is used to determine a given company’s ability to pay its obligations to debtors. A company that can’t pay its debtors is in danger of bankruptcy. TIE then as a business metric is a measure of the company’s health and certainty of its ability to continue operating.
Deriving the TIE of a given company is performed by way of an equation: dividing a company’s earnings before interest and tax (EBIT) or earnings before interest taxes, depreciation and amortization (EBITA) by its total interest payable on bonds and other contractual debt. The number of multiples of a company’s existing interest charges and debt is generally how TIE is expressed. It is generally considered a cautionary point when the TIE of a company drops 2.5 and below.
Companies that have consistent earnings are more able to be able to capitalize on their TIE with less risk. Companies with regular payments from clients can increase their debt when it provides a business opportunity and be sure that a momentary dip will not jeopardize their finance due to risked investment. Thus a company demonstrating an ability to pay its debt can raise capital through debt offerings rather than just by earnings through product and services or equity from issuing common stock.