what the tie ratio can tell you
obviously no company needs to cover its debts several times over in order to survive however the tie ratio is an indication of a company s relative freedom from the constraints of debt generating enough cash flow to continue to invest in the business is better than merely having enough money to stave off bankruptcy a company s capitalization is the amount of money it has raised by issuing stock or debt and those choices impact its tie ratio businesses consider the cost of capital for stock and debt and use that cost to make decisions companies that have consistent earnings like utilities tend to borrow more because they are good credit risks special considerationsas a rule companies that generate consistent annual earnings are likely to carry more debt as a percentage of total capitalization if a lender sees a history of generating consistent earnings the firm will be considered a better credit risk utility companies for example generate consistent earnings their product is not an optional expense for consumers or businesses some utility companies raise a considerable percentage of their capital by issuing debt startup firms and businesses that have inconsistent earnings on the other hand raise most or all of the capital they use by issuing stock once a company establishes a track record of producing reliable earnings it may begin raising capital through debt offerings as well 