Asked by: Nu Tacchi
business and finance debt factoring and invoice discounting

What is a good tie ratio?

Last Updated: 9th May, 2020

44
A higher times interest earned ratio is favorable because it means that the company presents less of a risk to investors and creditors in terms of solvency. From an investor or creditor's perspective, an organization that has a times interest earned ratio greater than 2.5 is considered an acceptable risk.

Click to see full answer.

Then, what does tie ratio mean?

Times interest earned (TIE) or interest coverage ratio is a measure of a company's ability to honor its debt payments. It may be calculated as either EBIT or EBITDA divided by the total interest expense.

Beside above, what is a good interest coverage ratio? Generally, an interest coverage ratio of at least two (2) is considered the minimum acceptable amount for a company that has solid, consistent revenues. In contrast, a coverage ratio below one (1) indicates a company cannot meet its current interest payment obligations and, therefore, is not in good financial health.

In this regard, how do you calculate tie ratio?

The times interest earned ratio is calculated by dividing income before interest and income taxes by the interest expense. Both of these figures can be found on the income statement. Interest expense and income taxes are often reported separately from the normal operating expenses for solvency analysis purposes.

What is a good debt to equity ratio?

A good debt to equity ratio is around 1 to 1.5. However, the ideal debt to equity ratio will vary depending on the industry because some industries use more debt financing than others. Capital-intensive industries like the financial and manufacturing industries often have higher ratios that can be greater than 2.

Related Question Answers

Eire Ladaga

Professional

What does a negative tie ratio mean?

The ratio is indicative of solvency of the Company. The ratio can be used as an absolute measure of the financial position of the Company. The ratio can be used as a relative measure to compare two or more Companies. The negative ratio indicates that the Company is in serious financial trouble.

Facunda Tiemblo

Professional

What is a good inventory turnover ratio?

For many ecommerce businesses, the ideal inventory turnover ratio is about 4 to 6. All businesses are different, of course, but in general a ratio between 4 and 6 usually means that the rate at which you restock items is well balanced with your sales.

Skye Quelard

Professional

What is DSCR calculation?

The debt service coverage ratio (DSCR) is defined as net operating income divided by total debt service. For example, suppose Net Operating Income (NOI) is $120,000 per year and total debt service is $100,000 per year.

Kim Bargados

Explainer

What does the debt ratio tell us?

The debt ratio is a financial ratio that measures the extent of a company's leverage. The debt ratio is defined as the ratio of total debt to total assets, expressed as a decimal or percentage. It can be interpreted as the proportion of a company's assets that are financed by debt.

Welington Bakker

Explainer

How do you increase tie ratio?

Times interest earned ratio is a measure of a company's solvency, i.e. its long-term financial strength. It can be improved by a company's debt level, obtaining loans at lower interest rate, increasing sales, reducing operating expenses, etc.

Ilargi Hatmullin

Explainer

What is quick ratio formula?

The quick ratio is a measure of how well a company can meet its short-term financial liabilities. Also known as the acid-test ratio, it can be calculated as follows: (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities.

Naser Oettl

Pundit

What is EBIT formula?

The EBIT formula is calculated by subtracting cost of goods sold and operating expenses from total revenue. This formula is considered the direct method because it adjusts total revenues for the associated expenses. You can also use the indirect method to derive the EBIT equation.

Mayca Eulenberger

Pundit

What is leverage ratio?

The leverage ratio is the proportion of debts that a bank has compared to its equity/capital. There are different leverage ratios such as. Debt to Equity = Total debt / Shareholders Equity.

Jacky Gorriti

Pundit

What are examples of liquidity ratios?

Examples of liquidity ratios are:
  • Current ratio. This ratio compares current assets to current liabilities.
  • Quick ratio. This is the same as the current ratio, but excludes inventory.
  • Cash ratio. This ratio compares just cash and readily convertible investments to current liabilities.

Sinead Agreda

Pundit

What is a good acid test ratio?

Generally, the acid test ratio should be 1:1 or higher; however, this varies widely by industry. In general, the higher the ratio, the greater the company's liquidity (i.e., the better able to meet current obligations using liquid assets).

Quiana Urtado

Pundit

What does Ebitda mean?

Earnings before interest, tax, depreciation and amortization (EBITDA) is a measure of a company's operating performance. Essentially, it's a way to evaluate a company's performance without having to factor in financing decisions, accounting decisions or tax environments.

Ostap Suhse

Teacher

What does a higher Times Interest Earned Ratio Mean?

A high ratio means that a company is able to meet its interest obligations because earnings are significantly greater than annual interest obligations. A lower times interest earned ratio means fewer earnings are available to meet interest payments.

Mohamedou Pfeffermann

Teacher

What is a bad interest coverage ratio?

A bad interest coverage ratio is any number below 1, as this translates to the company's current earnings being insufficient to service its outstanding debt. A low interest coverage ratio is a definite red flag for investors, as it can be an early warning sign of impending bankruptcy.

Abdelouafi Carapeto

Teacher

What is the formula of interest coverage ratio?

The interest coverage ratio is used to determine how easily a company can pay their interest expenses on outstanding debt. The ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) by the company's interest expenses for the same period.

Corrinne Kaesmacher

Reviewer

Is it better to have a high or low interest coverage ratio?

A higher ratio indicates a better financial health as it means that the company is more capable to meeting its interest obligations from operating earnings. On the other hand, a high ICR may suggest a company is "too safe" and is neglecting opportunities to magnify earnings through leverage.

Dilenia Pradillos

Reviewer

What is a good Ebitda coverage ratio?

EBITDA coverage ratio of 1.78 means that the company can safely pay off its periodic interest payment, debt principal repayment and lease payment obligations. However, the ratio is not as good as the industry average.

Evarist Bakhvaloff

Reviewer

How do you calculate debt capacity?

Debt Capacity Formula
Current ratio: The current ratio, which is the current assets divided by the current liabilities, lets a company know how well current bills are paid. Also called the “working capital” ratio, it shows a company's ability to pay short-term debts. A higher ratio indicates better repayment ability.

Kit Cocis

Reviewer

Is EBIT operating profit?

Operating profit – gross profit minus operating expenses or SG&A, including depreciation and amortization – is also known by the peculiar acronym EBIT (pronounced EE-bit). EBIT stands for earnings before interest and taxes. So operating profit, or EBIT, is a good gauge of how well a company is being managed.

Enrica Bujor

Supporter

How do we calculate Ebitda?

Here is the formula for calculating EBITDA:
  1. EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization.
  2. EBITDA = Operating Profit + Depreciation + Amortization.
  3. Company ABC: Company XYZ:
  4. EBITDA = Net Income + Tax Expense + Interest Expense + Depreciation & Amortization Expense.