Question

Do you think the TIE ratio is a practical measurement? And why?

Answer 1

TIE ratio is not a practical measurement but it gives the rough idea about the company ability to meet financial obligation. Times interest earned measures number of times interest paid out of earning before interest and tax. The problem with TIE ratio is Interest is a cash payment but EBIT is calculated by deducting cash and non cash expenses from revenue so it is subtotal on income statement rather than cash flow. So, sometimes availability of cash will be more or less as mentioned in terms of EBIT. Therefore both interest payment and EBIT are treated differently so TIE is not a practical measurement.