TIMES INTEREST EARNED Definition

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TIMES INTEREST EARNED (TIE) measures the extent to which operating income can decline before the firm is unable to meet its annual interest costs. The TIE ratio is used by bankers to assess a firm's ability to pay their liabilities. TIE determines how many times during the year the company has earned the annual interest costs associated with servicing its debt. Normally, a banker will be looking for a TIE ratio to be 2.0 or greater, showing that a business is earning the interest charges two or more times each year. A value of 1.0 or less suggests that the firm is not earning sufficient amounts to cover interest charges.  Formula: Earnings Before Interest & Taxes [EBIT] / Interest Charges

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PRIME RATE is the interest rate that banks charge to their preferred customers. Changes in the prime rate influence changes in other rates; mortgage interest rates for example.

RETURN ON STOCKHOLDERS EQUITY is a measure of how profitably the company is utilizing shareholders funds. It is calculated: profit after tax + total stockholders equity. Also called RETURN ON NET WORTH.

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