Final answer:
A Times Interest Earned (TIE) Ratio of 3.5 means the company can cover its interest payments 3.5 times with its earnings before interest and taxes. This indicates a solid capacity to service debt and signals financial stability to lenders and investors.
Step-by-step explanation:
A Times Interest Earned (TIE) Ratio of 3.5 times means that a company can cover its interest payments 3.5 times over. This is a financial metric that gauges a firm's ability to meet its interest obligations based on its current earnings before interest and taxes (EBIT). Essentially, the higher the TIE ratio, the more capable the firm is of servicing its debt, and the more wiggle room it has in terms of earnings to cover the interest expenses. This ratio is particularly important for lenders and investors as it reflects the firm's financial stability and risk associated with lending capital.
Firms typically borrow money through two main methods: banks and bonds. A firm that shows a history of significant revenues and profits can make a credible promise to pay interest, thereby facilitating its ability to borrow. This borrowing capacity is influenced by the firm's TIE ratio. In a scenario where a firm has a TIE ratio of 3.5, it suggests that for every dollar of interest it owes, the firm earns $3.50 in operating profit, which is a sign of healthy financial standing.