Times Interest Earned ratio isEBIT (Earnings before Interest and Taxes) / Interest Charges
EBITDA coverage ratio: This ratio has been developed to account for the deficiencies of “Times-Interest-Earned” (TIE) ratio. The TIE included only interest charges which is not the only fixed financial charges as there might be other charges such as lease etc. Another shortcoming is that EBIT does not represent all the cash flow which can be used to service debt. Debt-Service coverage ratio takes EBITDA-Earnings before Interest, Taxes, Depreciation and Amortization. That is because depreciation and amortization are non-cash expenditures, and therefore available for debt repayment.
This ratio must be more than 1. A ratio of less than 1 would mean that the firm does not have enough cash to service its debt. I.e. negative cash flow.
The EBITDA coverage ratio is very useful for relatively short-term lending agencies such as bank. This is because in a short-term, say 5 years, depreciation-generated funds can be used to service debt whereas over a long term, these funds must be reinvested to maintain the corresponding fixed assets of the company.
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