Why does a company have a low times interest earned ratio?

On the other hand, a company that uses a large amount of its capital as debt will have a low times interest earned ratio because of the high interest rates that they incur. For example, let’s say that the Times Interest Earned ratio is 3; that’s an acceptable risk for the investors.

What does a high times interest earned ratio mean?

It is calculated by dividing a company's EBIT by its interest expense, though variations change both of these figures. A high times interest earned ratio typically means a company has stronger performance and is less risky. However, a high calculation could also mean a company is not prioritizing growth and may not be a strong long-term investment.

How do you calculate times interest earned (tie) ratio?

The formula for calculating the times interest earned (TIE) ratio is as follows. The resulting ratio shows the number of times that a company could pay off its interest expense using its operating income. Alternatively, other variations of the TIE ratio can use EBITDA as opposed to EBIT in the numerator.

What is times interest earned?

The times interest earned, also known as interest coverage ratio, is a measure of how well a company can meet its interest-payment obligations. Using the formula and the information above, we can calculate that XYZ’s times interest earned is: