Interest coverage ratio or Times interest earned (TIE)

Interest coverage ratio or Times interest earned (TIE) – the essence of this indicator is to assess the risk of a situation in which the enterprise will not have cash to pay interest. The interest coverage ratio is as follows:

\begin{align}TIE = \frac{net \ profit + income \ tax + interest}{interest \ and \ bank \ charges}\end{align}

You can also come across a different formula for this indicator:

\begin{align}TIE = \frac{EBIT (operational \ profit)}{interest}\end{align}

Banks and financial analysts use this indicator as the simplest rule to assess the financial condition of a company.