Times Interest Earned Ratio [Formula + How To Calculate]

Have you ever taken on more than you meant to?

It happens in business, too, especially when debt starts piling up faster than expected. Even with accounting software in place, it’s easy for fast-growing companies to misjudge what they can realistically afford, particularly when a new loan, expansion plan, or major expense comes into the picture.

That’s why lenders and investors look closely at how well a company can handle its current financial obligations before approving additional funding. One common metric they use is the times interest earned (TIE) ratio.

If a company’s operating earnings are barely enough to cover interest payments and basic expenses, lenders may view it as a higher-risk borrower.

Using this formula, lenders can gauge how comfortably a business’s operating income covers its interest obligations. To calculate it, you need two numbers from your income statement: (A) EBIT and (B) interest expense (the interest accrued during the period).

How do you calculate the TIE ratio?

To calculate the times interest earned ratio, you only need two numbers from your income statement: earnings before interest and taxes and interest expense.

What is a good TIE ratio benchmark?

The higher the TIE, the better your chances are of honoring your obligations. A times interest earned ratio of 5 means you earn enough money to afford 5 times the amount of your current debt interest, and could probably take on a little more debt if necessary.

A low TIE suggests that you have more outstanding than your current capital. Capital can include shareholder equity, current assets, accounts receivable, and sales revenue. 

A TIE ratio of 2.5 is considered the dividing line between fiscally fit and not-so-safe investments. Lenders make these decisions on a case-by-case basis, contingent on their standard practices, the size of the loan, and a candidate's interview, among other factors. However, the times interest earned ratio formula is an excellent metric to determine how well a business can survive. 

What is earnings before interest and taxes, or EBIT?

Instead of focusing on revenue alone, EBIT reflects what your business earns after operating costs, but before interest and taxes. In most cases, it’s closely aligned with operating income.

EBIT example 

Example: If you bring in $10,000 this month and your overall operating expenses total $2,000, your EBIT for the month is $8,000. Your EBIT for the year is then projected at $96,000.

From there, you’ll account for taxes and any interest owed on loans or other debt. Your net income is the amount you’ll be left with after factoring in these outflows. Any portion reinvested into the business is typically reflected as retained earnings.

What is interest expense?

Besides a zero-interest period on a credit card or a few bucks between friends, loans and lines of credit come with an interest rate, which is an amount added every month or year based on a predetermined percentage of the total or the balance.

If you have three loans generating interest and don’t expect to pay those loans off this month, you must plan to add to your debts based on these different interest rates. This additional amount tacked onto your debts is your interest expense.

Interest expense example and time interest earned ratio derivation 

If a business maintains an average outstanding balance of $10,000 on a line of credit at 10% APR, the annual interest cost is about $1,000. If the business also carries a $5,000 loan at 5% APR, that adds about $250 per year. Combined, total interest expense is roughly $1,250 annually.  

As you pay down balances, your interest expense typically decreases over time. Still, if your debt load is high or rates rise, interest can become a significant ongoing cost alongside other operating expenses.

TIE is a useful snapshot of how comfortably a business can cover its interest payments. It doesn’t reflect the timing of cash flow, or whether the company can repay principal, so it’s most helpful when viewed alongside other debt and liquidity metrics.

What is an example of times interest earned ratio?

Imagine you own a family deli called Hold the Mustard.

The deli earns an average of $10,000 per month in EBIT (after operating expenses, but before taxes and interest), or $120,000 per year. You also have two interest-bearing obligations: a business loan with a current balance of $15,000 at 5% annual interest, and a company credit card balance of $5,000 at 15% annual interest.

With business growing, you’re considering a $100,000 renovation and looking at a local bank loan to help fund it.

How to calculate interest expense

Your income statement will often list interest expense for you, but here’s how the total is calculated:

Business loan:

• Current balance = $15,000
• Annual interest = 5 percent
• Interest for this year = $750

Credit card:

• Current balance = $5,000
• Annual interest = 15 percent
• Interest for the year = $750

Total interest expense: $750 + $750 = $1,500

How to calculate the times interest earned ratio

Now plug EBIT and interest expense into the TIE formula:

$120,000 (EBIT) ÷ $1,500 (interest expense) = 80 (TIE ratio)

A TIE ratio of 80 suggests Hold the Mustard’s operating earnings cover its interest expense many times over, which typically signals strong interest coverage. While lenders consider other factors beyond this ratio, a result like this generally supports the case that the business can comfortably handle its current interest payments.

Additional TIE example

Now consider another nearby deli called Dill With It.

Dill With It earns $20,000 per month in EBIT (before taxes and interest), or $240,000 per year. But unlike Hold the Mustard, the business is carrying a much heavier debt load.

They still have a startup loan with a current balance of $800,000 at 10% annual interest. They also took out a second loan for a billboard campaign with a balance of $30,000 at 15% annual interest. On top of that, the business has credit card balances totaling $50,000 at 20% annual interest.

How to calculate interest expense for multiple debts

Here’s a breakdown of the company’s interest expense across its outstanding debts:

Loan No. 1:

• Current balance = $800,000
• Annual interest rate = 10 percent
• Interest for the year = $80,000

Loan No. 2

• Current balance = $30,000
• Annual interest rate = 15 percent
• Interest for the year = $4,500

Credit cards:

• Current balance = $50,000
• Annual interest rate = 20 percent
• Interest for the year = $10,000

Total interest expense: $80,000 + $4,500 + $10,000 = $94,500

How to interpret the result

Now Dill With It wants to take out a third loan to fund an expansion project.

Using the figures from the income statement, the lender calculates the TIE ratio:

$240,000 (EBIT) ÷ $94,500 (interest expense) ≈ 2.54 (TIE ratio)

A TIE ratio around 2.5 is often treated as a caution threshold. It suggests the business has less room to absorb an earnings dip or higher borrowing costs, which may limit financing options depending on the lender’s risk tolerance and industry benchmarks. If the loan is declined, the business may need to reduce its interest burden or improve its operating earnings before borrowing more.

What are the limitations of the TIE ratio?

There’s no single “good” TIE ratio that applies to every business, because benchmarks vary by industry and business model. It’s best used as a supporting metric. Here are some limitations of the times interest earned ratio:

• Focuses on interest coverage only: TIE shows whether operating earnings can cover interest expense, but it doesn’t reflect full debt obligations or long-term repayment capacity. It also doesn’t account for cash timing issues, such as delayed receivables, seasonal revenue, or working capital constraints.
• Based on accounting earnings, not cash flow: TIE uses EBIT (or an adjusted earnings figure), which can differ from actual cash generated. A company may show strong EBIT while still facing cash flow pressure.
• Industry specificity: TIE can vary based on the nature of the business or business model. For example, capital-intensive industries often operate with different “healthy” ranges than asset-light businesses, so comparisons should be made within the same industry
• Doesn’t reflect future obligations: TIE is based on current interest expense and doesn’t account for planned borrowing, refinancing risk, or changes in debt terms. 
• Sensitive to earnings swings: A temporary dip in earnings can lower the ratio quickly, even if the underlying business remains stable.
  

What are some other financial health metrics other than TIE?

Because the times interest earned ratio focuses only on interest coverage, it’s best interpreted alongside other debt and liquidity metrics.

• Debt-to-equity ratio: This ratio measures how much a company finances itself with debt compared to shareholder equity. A high D/E ratio may signal over-leverage and risk, even if the TIE ratio looks healthy. It's particularly useful for assessing long-term solvency.
• Current ratio: This ratio assesses a company's ability to meet short-term obligations with current assets. It helps determine whether the business can meet near-term obligations, not just cover interest payments.
• Cash flow statement: This statement shows actual cash inflows and outflows, which helps validate whether earnings translate into cash available to cover debt costs, especially when non-cash expenses affect profitability.
• Fixed-charge coverage ratio (FCCR): This ratio expands on TIE by including fixed financial obligations beyond interest. That can include lease or rent payments and other fixed charges. It’s useful for businesses with significant operating leases or contractual fixed expenses.
• Debt service coverage ratio (DSCR): Unlike TIE, which focuses on interest, DSCR measures a company’s ability to service total debt payments, including both interest and principal, using operating income or cash flow.

What is the impact of economic downturns on the times interest earned ratio?

Economic downturns can quickly weaken a company’s times interest earned ratio by squeezing operating earnings and, in some cases, increasing borrowing costs.

During periods such as recessions or industry slowdowns, revenue may decline while expenses remain relatively stable, which can result in a reduction in EBIT. At the same time, interest rates may rise, or lenders may tighten terms, increasing interest expense. When EBIT drops and interest costs rise, the TIE ratio declines, even if the business was previously in a strong position.

Downturns can also create cash flow pressure by delaying customer payments or reducing incoming cash, which makes it harder to stay current on interest payments, even when profitability appears acceptable on paper.  

Frequently asked questions about the times interest earned ratio

Got more questions? We have the answers.

Q1. What’s the difference between TIE and the interest coverage ratio?

They’re often used interchangeably. In most contexts, both refer to how many times a company can cover its interest expense using earnings before interest and taxes.

Q2. Is EBIT or EBITDA better for calculating TIE?

EBIT is the standard input for TIE. Some analysts use EBITDA (or EBITA) for an interest coverage variation when depreciation and amortization materially affect operating profit, but it’s important to use the same approach consistently when comparing companies or time periods.

Q3. What is a safe TIE ratio?

Typically, a TIE ratio between 3 and 5 is considered safe. Ratios below 2 are considered risky, while those above 5 suggest strong debt coverage; however, excessively high ratios may indicate underutilized capital.

Q4. Can a very high TIE ratio be a bad sign?

Yes. While a high TIE indicates strong interest coverage, it may also suggest that the business is overly conservative with debt, potentially missing out on growth opportunities.

Q5. Is a TIE ratio of 2.5 considered good?

It’s on the edge. Some lenders view 2.5 as the minimum acceptable threshold. Context matters; compare your results against your industry’s benchmark before making a decision.

Q6. How can I improve my TIE ratio?

Increase EBIT by growing revenue or cutting costs, or decrease interest expense by refinancing loans, negotiating better terms, or reducing debt.

Address your debts

Most lenders won’t approve new financing without clear evidence that a business can manage its current debt costs. It’s also easy to accumulate debt across multiple sources without a clear repayment plan. If your times interest earned ratio is low, treat it as a signal to reassess how comfortably your earnings cover interest payments. Improving operating earnings, reducing interest expense, and protecting cash flow can strengthen interest coverage and make future borrowing decisions easier.

Learn more about how to prep yourself for an SBA loan that can help grow your business and have cash reserves so that you can build better product experiences.