Times Interest Earned - What is it and How to Calculate it

Part I: Reporting in Action 

Times Interest Earned (TIE) describes a metric used to determine a firm’s capacity to meet its debt mandate. TIE is computed by dividing the business’ Earnings before Interest and Taxes (EBIT) by Interest Payable on Bonds and Contractual Debts. For Apple, the following were the TIE for the years ending September 28, 2013: 

2013: TIE = 1616/136 = 11.88 

2012: TIE = 1088/100 = 10.88 

2011: TIE = 519/100 = 5.19 

Based on the findings from the TIE calculations above, it is true that Apple Inc. has the ability to meet its debt obligations. The times interest ratio, otherwise referred to as the times interest earned ratio, is often displayed as a number instead of the common use of percentage. The number depicting the TIE highlights how many times a business organization can pay the interest on its debts using its income before tax. In this regard, it is accurate that Apple, with larger TIE ratio for the 2011-2013 period, had the ability to meet its debt obligations. In the financial year 2013, the company had sufficient income to pay the interest almost 12 times over. In 2012, Apple had enough income to pay interest almost 11 times over. Finally, the firm could use its income to pay for the interest 5 times over in the 2011 financial year. 

“ Loyalty Reward Liabilities” are estimated liabilities. Under a company’s loyalty programs, a liability is created by rewarding employees using redeemable points for outstanding performance or after achieving specific company goals. 

The financial statements indicate that the accrued expenses were $13,856,000 in 2013 and $11,414,000 in 2012 financial year. The accounts making up the accrued expenses include accrued taxes, accrued employee benefits and compensation, accrued warranty/related costs, other liabilities, accrued selling and marketing expenses, and deferred margin on unit/component sales. 

Part II: Comparative Figures for Apple and Google Follow 

Times Interest Earned (TIE) for Google Follow and Apple are computed as follows: 

Apple: 

TIE (current year) = net income/interest expense = 37037/136 = 272.33 

TIE (one year earlier) = net income/interest expense = 41733/100 = 417.33 

TIE (two years earlier) = net income/interest expense = 25922/100 = 259.22 

Google: 

TIE = net income/interest expense = net income/interest expense = 12920/83 = 155.66 

TIE (one year earlier) = net income/interest expense = 10737/84 = 127.82 

TIE (two years earlier) = net income/interest expense = 9737/58 = 167.88 

In case there is a foreseeable decline in income, Google Inc. seems more capable of paying its debt obligations than Apple. The ability for a company to pay its debt obligation requires larger numbers of the times interest earned. With an industry average of 10, Google seems capable of meeting its debt mandate because of a steady increase or fall in its times interest earned over the three-year duration. Apple, on the other hand, has demonstrated a fleeting increase in its times interest earned although the fall in net income was not comparable to the reports demonstrated by Google Inc. In principle, creating cash flow for interest payments as well as averting bankruptcy requires a firm’s ability to generate sufficient earnings. Capitalization denotes the amount of money a business organization should raise via issuing bonds, stock, and debt. Capitalization is accounted for in the times interest earned because it highlights the interest payable on stock or bonds as well as other contractual debts. Apple has a versatile times interest ratio, with the computed values indicating that the ratio have not reduced to levels below 0. Although the company has demonstrated a decline in some years, its ability to pay its debt obligations is higher than Google’s. 

Part III: Global Discussion 

For Samsung, the times interest earned for the most recent two years is determined by dividing the net income by the interest expense. The following procedure outlines the outcomes for the company’s times interest earned: 

TIE (current year) = net income/interest expense = 30,474,764/7,754,972 = 3.93 or 393 

TIE (prior year) = net income/interest expense = 23,845,285/7,934,450 = 3.01 or 301 

Of the companies listed, Apple has the best coverage of expense. Coverage of interest expenses is demonstrated by the times interest earned. In the current year, Apple had the highest times interest earned, followed by Samsung. Google demonstrated a steady performance in the growth of its times interest earned. However, Apple displayed its position as the giant in meeting debt obligations because it could pay the interest almost 370 times over in the current year. Samsung appears the strongest enterprise in the current times regarding the capacity to pay interest, however, the interest earned had decreased probably because of cutting on investment activities. Apple reported a significant ability to pay its obligations by reporting a times interest earned ratio of 5.58 in the prior year, how increase an increase in investment activities and more debts might have contributed to the slight fall in the times interest earned ratio.