What is Times Interest Earned (TIE)?
Times Interest Earned, also called interest coverage ratio, measures how many times a company’s operating profit can cover its interest expense. It is calculated as earnings before interest and taxes (EBIT) divided by interest expense. A higher ratio signals stronger ability to service debt.
How It Works
- Take EBIT (operating profit) from the income statement.
- Divide by interest expense.
- A ratio below 1.5 is usually a red flag for lenders.
- Banks include TIE covenants in many loan agreements.
Saudi Context
Saudi lenders typically require minimum TIE covenants of 2.0 or higher for corporate borrowers, with breach triggering accelerated repayment.
Example
If EBIT is SAR 30 million and interest expense is SAR 6 million, TIE is 5x, meaning operating profit covers interest five times over.