Times Interest Earned Ratio Examples, Samples, Illustration ,Concepts,Calculations Help Online
In accounting world, times interest earned ratio is an important concept. Many students find it difficult to understand it and fails to solve times interest earned ratio example. Just have a look at our site. We are sure that after looking at times interest earned ratio examples in our site you will be capable to understand this concept easily.
Meaning of Times Interest earned ratio
Times Interest earned ratio is also known as TIE or Interest coverage ratio. Times interest earned ratio is used to measure the capability of a company to meet its debt obligations. Times interest ratio is also considered as solvency ratio as it measures the firm’s ability to make payments of its liabilities. Breaking down of times interest earned ratio indicates the failing of the company to meet its obligations that leads to bankruptcy. For calculating times interest earned ratio, earnings before interest and tax & interest expense can be obtained from the income statement of the company.
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Formula for calculating times interest earned ratio
Times interest earned ratio (TIE) = Earnings before interest and taxes (EBIT) / total interest payable on bonds and debts
TIE = earnings before interest and tax / interest expense
Examples of times interest earned ratio
EXAMPLE: Following statements has been collected from the income statement of XYZ Co.
Net income = $900000
Interest expenses of the company = $400000
Taxes = $300000
Using the information given above, calculate the XYZ’s times interest earned ratio.
SOLUTION: Times interest earned ratio = $900000+ $300000 / $400000 = 3.0
That means XYZ Co. is three times able to meet its interest payments.
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