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Interest coverage ratio

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(Querist)
29 December 2011 What is interest coverage ratio?
How is it calculated?
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chetan soni

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chetan soni (Expert)
29 December 2011 A ratio used to determine how easily a company can pay interest on outstanding debt. The interest coverage ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) of one period by the company's interest expenses of the same period:

Interest Coverage Ratio= EBIT/INTEREST EXPENSES

The lower the ratio, the more the company is burdened by debt expense. When a company's interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable. An interest coverage ratio below 1 indicates the company is not generating sufficient revenues to satisfy interest expenses.



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