Interest Coverage Ratio

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Commodity Online  May 29  Comment 
For ascertaining the credit quality trends of Indian corporates, Ind-Ra has focused on FFO based measures of interest coverage. For FY13, only 75% of corporates (account for 68% of outstanding debt in FY12) had FFO interest coverage above 2.0x....
Penny Stock DD  Dec 10  Comment 
The following is a list of stocks with a high short float, meaning that a significant portion of the company's shares have been shorted. All of the stocks mentioned in this list have short floats higher than 20%. Despite the apparent...
Investing School  Oct 29  Comment 
Coverage ratio is a number that refers to a company’s ability to meet its obligations. Specifically, the ratio involves dividing the company’s income or cash flow with a certain expense and this will determine the company’s financial...
Stock Market and Economic Analysis  May 14  Comment 
The Indian Stock markets have gone up over 40% in the last two months. But not everything is fine with the fundamentals of Corporate India. In this article I would primairly discuss how the interest coverage ratio (combined statistics) for all...
Equitycatwalk  Apr 10  Comment 
 DCF modelling: the current balance sheet isn't very strong and the net debt ebitda metrix seems to be a bit stressed, which is also being confirmed by the company. The interest coverage and net debt versus total capital isn't that bad though. If...
Barel Karsan  Jan 24  Comment 
In order to determine if a company's debt load is over burdensome, investors often use interest coverage ratios. One such ratio is found by dividing operating income by interest due, in order to determine how easily the company is able to meet its...




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A company's Interest Coverage Ratio is calculated as EBIT divided by Interest payments.

The interest coverage ratio is a measure of a company's ability to meet its interest payments. A higher ratio indicates a better financial health as it means that the company is more capable to meeting its interest obligations from operating earnings.

A ratio less than 1 would indicate that a company has crippling debt obligations as it uses its entire earnings to pay interest, leaving no income for the common shareholders or to repay back the debt. In such extreme cases, the company would have to sell off its assets, or raise more equity in order to repay some of the debt -- so that it can reduce its interest expense and, in turn, improve the interest coverage ratio.


Example

  • Company A generates $200,000 in earnings before interest and taxes in 2007, and has an interest expense of $100,000 during the same period. This would mean that the interest coverage ratio is 2.
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