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Interest Coverage Ratio

Understanding the Interest Coverage Ratio: Measuring Debt Servicing Ability

The Interest Coverage Ratio is a financial metric used to determine how easily a company can pay interest on its outstanding debt. It measures a company's ability to meet its interest obligations with its earnings before interest and taxes (EBIT). A higher ratio indicates a greater ability to cover interest expenses.

Interest Coverage Ratio = EBIT​ / Interest Expense


Suppose Company PQR has the following financial details:


  • Earnings Before Interest and Taxes (EBIT): $300,000

  • Interest Expense: $50,000


To calculate the Interest Coverage Ratio:


  1. Divide EBIT by interest expense: 300,000 / 50,000 = 6

An Interest Coverage Ratio of 6 indicates that Company PQR earns six times its interest expense, suggesting it is well-positioned to meet its interest obligations comfortably.

Leverage Ratio

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