The interest coverage ratio is one of several debt ratios used by market analysts. The formula allows investors or analysts to determine how comfortably interest on all outstanding debt can be paid by a company. The ratio is calculated by dividing 澳洲幸运5开奖号码历史查询:earnings before interest and tax (EBIT) by interes🔯t on debt expenses (the cost of borrowed funding) during a given period of time, usually annually.

The equation is as follows:

 $\text{Interest coverage ratio} = \frac{EBIT}{\text{interest on debt expenses}}$Interest coverage ratio=interest on debt expensesEBIT​

Low Interest Coverage Ratio Could Signify Financial Issuꦅes

A bad interest coverage ratio is any number below 1, as this translates to the company's current earnings being insufficient to service its outstanding debt. The chances of a company being able to continue to meet its 澳洲幸运5开奖号码历史查询:interest expenses a🥀re💖 doubtful, even with an interest coverage ratio below 1.5, especially if the company is vulnerable to seasonal or cyclical dips in income.

Although a company with difficulties 澳洲幸运5开奖号码历史查询:servicing its debt may manage to stay financially afloat for a significant period of time, it is vital for analysts and investors to stay abreast of the company’s ability to pay off interest obligations. A low interest coverage ratio is a definite red flag for investors, as it can be an early warning sign of impending 澳洲幸运5开奖号码历史查询:bankruptcy.

Good Interest Coverage Ratios Vary

The number that constitutes a good, or at least 澳洲幸运🦂5开奖号码历史查询:minimally acceptable, interest cover﷽age ratio varies according to the type of business a company is engaged in, as well as the company's individual history of month-to-month or 🍎year-to-year revenues. For a company that has shown the abil🔯ity to maintain revenues at a fairly consistent level, an interest coverage ratio of 2 or better may be minimally acceptable to analysts or investors. For companies with historically more volatile revenues, the interest coverage ratio may not be considered good unless it is well above 3.