Red flags to look out for when investing in a company?

Below 1 TIE Ratio for consecutive years is a definite red flag for me. This means they can't even produce enough earnings to cover the interest payments owed by them to their creditors. If their assets aren't able to pay off their debtors, equity holders will get absolutely nothing (hyflux). A big big lesson to learn there is that we need to be extremely clear that private companies aren't going to be bailed out by the government because of poor management, and unrated bonds must have even higher scrutiny involved regarding financial statements to see that they can meet their obligations.

Hi there!

One ratio that I might want to take a closer look at is the Debt Service Coverage Ratio, which is a measurement of the cash flow available to pay current debt obligations.

While TIE and DSCR essentially measures the same thing, DSCR is slightly more comprehensive, assessing the ability of a company to meet its minimum principal on top of interest payments.

Lenders will routinely assess a borrower's DSCR before making a loan. A DSCR of less than 1 means that the borrower will be unable to cover or pay current debt obligations without drawing on outside sources – without, in essence, borrowing more.