The TIE ratio depends on the percentage of debt in the capital structure of the firm, the interest rate on the debt, and the profitability of the firm.

Question

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The TIE ratio (or interest coverage ratio) is calculated by dividing the earnings before interest and taxes (EBIT) by the interest expense. Therefore, it depends on the profitability of the firm (measured by EBIT) and the interest rate on the debt. The percentage of debt in the capital structure of the firm is not a direct determinant of the TIE ratio but may indirectly affect it by influencing the interest rate and the credit risk perception of the firm.

The TIE Ratio Depends on the Percentage of Debt in the Capital