It’s difficult to define a “good” interest coverage ratio. This is because it is likely to vary from industry to industry so it is hard to pinpoint an ideal ratio. For example, the debt payments for manufacturing will be vastly different when compared with technology businesses. The gener...
The times interest earned ratio, sometimes called the interest coverage ratio, measures the proportionate amount of income that can be used to cover interest expenses in the future.
A high ratioindicates there are enough profits available to service the debt. But, it may also mean the company is not using its debt properly. For example, if a company is not borrowing enough, it may not be investing in new products and technologies to stay ahead of the competition in ...
The “coverage” represents the number of times a company can successfullypay its obligationswith its earnings.A low ratio may signal that the company has high debt expenses with minimal capital. For example, when a company’s interest coverage ratio is 1.5 or lower, it can only cover its ob...
For example, a two would suggest that a company could make interest payments twice from its current revenues. A negative number indicates that a company cannot cover these obligations and is likely experiencing financial difficulty. Low interest cover for a particular period may not be a reliable ...
When analyzing stocks, getting a feel for the business's financial health and strength is important. One smart way to do it is with the interest coverage ratio. Let's check it out.
Interest expense is the cost of borrowing money during a specified period of time. Interest expense is occurring daily, but the interest is likely to be paid monthly, quarterly, semiannually, or annually. Example of Interest Expense Let’s assume that a company uses the accrual basis of accoun...
The larger the times interest earned ratio, the more likely that the corporation can make its interest payments. The times interest earned ratio is also referred to as the interest coverage ratio. Example of Times Interest Earned Ratio Assume that a corporation had the following amounts for the...
The interest coverage ratio measuresthe ability of a business to pay back its interest expense. It’s important to calculate this rate before taking out a loan of any sort to make sure the business can afford to repay its debt. Creditors and inventors are also interested in this ratio when...
If we do not have cash flow from operations, we can use the following alternate formula to work out interest coverage ratio:Interest Coverage Ratio = EBIT + Depreciation & Amortization InterestExampleFollowing is an extract from Volkswagen financial statements for the financial year 2015 and 2016. ...