The times interest earned ratio is calculated by dividing the firm’s EBIT (earnings before interest and taxes) by its interest expenses. It measures how well the firm manages interest payments with its earnings.
Times interest earned formula
The time interest earned ratio formula is computed as:
TIE Ratio = EBIT / Interest Expense
How to calculate times interest earned in Excel
Where;
C4 represents the EBIT i.e., $75,000
C5 represents the Interest expenses i.e., $12,000
C6 represents the TIE ratio formula.
Time Interest Earned Formula = C4/C5
This example indicates that 6.25 times the firm’s ability to cover its interest expenses with its earnings. A higher TIE ratio indicates better coverage and lower financial risk.