What is low interest coverage ratio

If a company has a low-interest coverage ratio, there's a greater chance the company won't be able to service its debt, putting it at risk of bankruptcy. In other words, a low-interest coverage ratio means there is a low amount of profits available to meet the interest expense on the debt.

What does it mean when an interest coverage ratio decreases?

The lower the interest coverage ratio, the greater the company's debt and the possibility of bankruptcy. Intuitively, a lower ratio indicates that less operating profits are available to meet interest payments and that the company is more vulnerable to volatile interest rates.

What does the interest coverage ratio tell us?

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 does an interest coverage ratio of 1.8 mean?

The higher your cash coverage ratio, the better the financial condition your business is in. But how do you know when you should be concerned? Any time that your cash coverage ratio drops below 2 can signal financial issues, while a drop below 1 means your business is in danger of defaulting on its debts.