Time Correction: How Markets Tacitly Reconcile Bulls and Bears!
Booms and busts have now become a normal part of the business cycles. Due to monetary inflation, the value of assets is expected to rise every year. However, a lot of time this rise does not happen. Sometimes, this rise is replaced by a fall. This fall is called a market correction or a crash […]
Roadshows in Investment Banking
Roadshows are an important part of the investment banking process. This is because this is the stage where all the stakeholders i.e., the company issuing shares, the investment bankers, as well as potential investors, are all present at the same place. Roadshows are generally undertaken by private companies that are looking to list on a […]
Private Equity Investments in the Sports World
Sporting franchises across the world have traditionally been owned by wealthy individuals. This has largely been because of the fact that sporting franchises have been viewed less as financially viable investments and more as vanity toys. However, all this has started changing in the wake of stellar returns provided by sporting franchises in the recent […]
Series B Funding
In the previous articles, we have already learned about the seed funding stage as well as the series A funding stage. We know that entrepreneurs raise seed funding in order to be able to build the prototype of the product. After the prototype is in place, they raise Series A funding to build the actual […]
Regret Aversion Bias
In order to be successful at investing, an investor not only needs to have mastery over their numbers, but they also need to have mastery over their emotions as well. In the past few articles, we have already discussed how emotional biases can lead to suboptimal performance in investing. In this article, we will try […]
The interest coverage ratio is a number that has a lot of importance for the creditors of the firm. This number tells them how safe their investments are and how likely they are to get back principal and interest on time.
Interest Coverage Ratio = EBIT / Interest
The interest coverage ratio tells investors how many rupees they have made in profit, per rupee of interest that they owe to their shareholders. Thus if the interest coverage ratio is 3, then the firm has 3 rupees in profit for every 1 rupee in interest obligations. Thus profits will have to fall by more than 66% for the firm to register a loss.
The standard assumption of no accounting manipulation in either of the two numbers involved (EBIT and Interest expenses in this case) is made while calculating the interest coverage ratio.
On the other hand, companies with highly variable sales, like technology and apparel companies, need to have a high interest coverage ratio. These industries are prone to wild fluctuations is sales and investors want to ensure that their cash flow is not interrupted as a result. Hence they demand a higher interest coverage ratio before they give out their money.
Your email address will not be published. Required fields are marked *
