Interest Coverage Ratio - Meaning, Assumptions and Interpretation
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.
- Debt Ratio
- Equity to Fixed Assets Ratio
- Proprietary Ratio
- Degree of Financial Leverage Ratio
- Degree of Operating Leverage Ratio
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