Times Interest Earned
Also known as the "Interest Coverage Ratio."
Times interest earned is a key metric to determine the credit worthiness of a business. Essentially, the number represents how many times during the last 12 months' EBIT or Annual (earnings before interest and taxes) would have covered the past 12 months or annual interest expenses.
This ratio works well when looking at manufacturing businesses, utilities, and certain service businesses. It should be used with care when analyzing financial service companies because their business models borrow differently from traditional manufacturing and service businesses.
Times Interest Earned = Earnings Before Interest and Taxes * / Interest Income *
* These metrics can be either TTM or Annual. For instance, Times Interest Earned (Annual) would be calculated by Earnings Before Interest (Annual) / Interest Income (Annual).
Interest Income is the sum of Interest Payments sent and received. For companies that have a positive interest income (ie. cash inflow), an TIE is not calculated. For companies with a negative interest income, this indicates an interest payment (cash outflow) and will be used to calculate TIE.