How is the Times Interest Earned (TIE) ratio calculated?

The Times Interest Earned (TIE) ratio is an important measure of a company's ability to meet its debt obligations, specifically its interest payments. It is calculated by dividing Earnings Before Interest and Taxes (EBIT) by interest expenses. This calculation provides insight into how many times a company can cover its interest expenses with its earnings.

In essence, a higher TIE ratio indicates a greater ability of the company to fulfill its interest obligations, which can be seen as a sign of financial stability. For example, if a company has a TIE ratio of 5, it means it earns five times what it needs to pay in interest, suggesting a lower risk of default.

The other provided choices do not represent the TIE ratio. Net income divided by total assets reflects return on assets (ROA), which measures profitability relative to total asset investment. Gross profit divided by liabilities does not have a established financial significance. Total revenue divided by equity relates to return on equity (ROE), measuring profitability relative to shareholders' equity. These measures provide different insights into a company's financial performance but do not specifically address its ability to cover interest payments, which is the focus of the TIE ratio.