With these financial information for Company ABC:
- (EBIT)Earnings Before Interest and Taxes = 500,000
- Interest Expenses = 50,000
What is the Interest Coverage Ratio ?
Answer: (EBIT)Earnings Before Interest and Taxes 500,000/50,000=10
Which means company’s (EBIT)Earnings Before Interest and Taxes is sufficient to cover its interest expenses 10 times over. Also means low default risk on debt obligations
It measure company’s financial health and solvency. Industries with stable cash flows and lower levels of debt may have higher ratios, while industries with higher capital intensity and greater debt obligations may have lower ratios