Another ratio used to measure Long-Term solvency is the times interest earned (TIE) ratio. There are several definitions but the most common is shown below:
Times interest earned ratio = EBIT/Interest
If EBIT was $638 and Interest expense was $154 then the TIE ratio would be as follows:
$638/$154 = 4.14 times
This ratio measure how a company has its interest expense covered. For the example above, the EBIT cover the interest bill 4.14 times.
A problem with this ratio is that it measures a firm's ability to pay interest based on EBIT which deducts non-cash expenses such as depreciation and amortization. A common measure that creditors use in place of the TIE ratio are Cash Coverage Ratio s.
