Final answer:
Depreciation is the item added back to EBIT when calculating the cash coverage ratio but not when calculating the times interest earned ratio. The cash coverage ratio includes non-cash charges like depreciation to reflect the actual cash available, whereas the times interest earned ratio does not adjust for these non-cash expenses.
Step-by-step explanation:
The item that is added back to Earnings Before Interest and Taxes (EBIT) while calculating the cash coverage ratio, but not while calculating the times interest earned ratio, is Depreciation.
The cash coverage ratio measures a company's ability to cover its interest obligations with its operating cash flow, which includes non-cash expenses such as depreciation and amortization.
Depreciation is a non-cash charge that reduces earnings for accounting purposes but does not reduce the company's cash flow. Hence, it is added back to calculate the true cash available to cover interest expenses.
To calculate the cash coverage ratio, you take the EBIT and add back any non-cash expenses like depreciation and amortization before then dividing by the interest expense.
In contrast, the times interest earned ratio, also known as the interest coverage ratio, uses just the EBIT and divides this by the interest expense, without any adjustments for non-cash expenses.