Interest Coverage Ratio

Posted in Finance, Accounting and Economics Terms, Total Reads: 1433
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Definition: Interest Coverage Ratio

Interest coverage ratio gives an indication of the ability of a firm to make its regular interest payments arising out of its outstanding debt. The ratio can be simply calculated as follows,


Formula:

Interest coverage ratio = EBIT/(Interest expenses)


Where, EBIT = Earnings before Interest and Taxes


The lower the ratio, the higher is the probability of the firm to be not able to meet its expenses. If the ratio is less than 1, it indicates that the firm is not generating enough earnings to meet its interest expenses.


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