Times Interest Earned Ratio/TIE Ratio/Liquidity Ratios
• This is a type of liquidity ratio linked with cash flows
• The ratio measures a company’s ability to meet its debt obligations on a periodic basis.
• The ratio calculates the number of times a company could pay its periodic interest expenses if it devoted all its earnings before interest and taxes (EBIT) to debt repayments.
• The ratio is used to help quantify a company’s probability of default
• The ratio helps determine relevant debt parameters such as the appropriate interest rate to be charged or the amount of debt the company can safely take on.
• A higher times interest earned ratio suggests that a company will be less likely to default on its loans.
• This implies that the company is a safer investment opportunity for debt providers.
• Conversely, a low times interest earned ratio means a company has a higher chance of default.
• As with all liquidity ratios, having too high of a TIE ratio suggests that the company is not properly utilizing its excess cash towards growth and return generating projects, and is instead leaving it unused.
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