What means interest coverage ratio?
The interest coverage ratio is a debt and profitability ratio used to determine how easily a company can pay interest on its outstanding debt. The interest coverage ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) by its interest expense during a given period.
Do you want a low or high interest coverage ratio?
Generally, a higher interest coverage ratio is better than a lower one. A higher ratio represents a stronger ability to meet a company's interest expenses out of its operating earnings. Too low of an interest coverage ratio can signify that a company may be in peril if its earnings or economic conditions worsen.
What does an interest coverage ratio of 1.8 mean?
An interest coverage ratio of 1.8 means it is a little risky to lend businesses having such ratios. As Minimum interest coverage ratio is 2 times. c. It is computed on the basis of EBIT (Earnings before Interest and Tax) because interest on the loan is also a tax-deductible expense.
What is the importance of interest coverage ratio?
Interest coverage ratio serves as a solvency check for an organization. It allows investors, financial institutions and the market to understand the current ability of the firm to pay accumulated debts. It is also used to assess the profitability of the firm.
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