Quick Answer: How Do You Explain Interest Coverage Ratio?

What is a good Ebitda to interest coverage ratio?

It can be used to measure a company’s ability to meet its interest expenses.

However, EBITDA is typically seen as a better proxy for the operating cash flow of a company.

When the ratio is equal to 1.0, it means that the company is generating only enough earnings to cover the interest payment of the company for 1 year..

What is a bad interest coverage ratio?

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.

What is a fixed charge coverage ratio?

The fixed-charge coverage ratio (FCCR) measures a firm’s ability to cover its fixed charges, such as debt payments, interest expense, and equipment lease expense. It shows how well a company’s earnings can cover its fixed expenses. Banks will often look at this ratio when evaluating whether to lend money to a business.

What is interest burden ratio?

Interest burden is the ratio of earnings before taxes (EBT) to earnings before interest and taxes (EBIT). It shows the percentage of EBIT left over after deduction of interest expense. In order to achieve a high ROE, a company must reduce its interest expense such that the EBT/EBIT ratio is high.

Is interest coverage ratio a liquidity ratio?

The interest coverage ratio is a financial ratio that measures a company’s ability to make interest payments on its debt in a timely manner. Unlike the debt service coverage ratio, this liquidity ratio really has nothing to do with being able to make principle payments on the debt itself.

Is it better to have a high or low interest coverage ratio?

The lower the interest coverage ratio, the higher the company’s debt burden and the greater the possibility of bankruptcy or default. … A higher ratio indicates a better financial health as it means that the company is more capable to meeting its interest obligations from operating earnings.

How do you increase interest coverage ratio?

Here are a few ways to increase your debt service coverage ratio:Increase your net operating income.Decrease your operating expenses.Pay off some of your existing debt.Decrease your borrowing amount.

What is a good interest coverage ratio?

Generally, an interest coverage ratio of at least two (2) is considered the minimum acceptable amount for a company that has solid, consistent revenues. … In contrast, a coverage ratio below one (1) indicates a company cannot meet its current interest payment obligations and, therefore, is not in good financial health.

What is interest coverage ratio with example?

To provide an example of how to calculate interest coverage ratio, suppose that a company’s earnings during a given quarter are $625,000 and that it has debts upon which it is liable for payments of $30,000 every month. … The lower a company’s interest coverage ratio is, the more its debt expenses burden the company.

What is asset coverage ratio?

The asset coverage ratio is a financial metric that measures how well a company can repay its debts by selling or liquidating its assets. The asset coverage ratio is important because it helps lenders, investors, and analysts measure the financial solvency of a company.

What does the cash ratio tell you?

The cash ratio is a measurement of a company’s liquidity, specifically the ratio of a company’s total cash and cash equivalents to its current liabilities. The metric calculates a company’s ability to repay its short-term debt with cash or near-cash resources, such as easily marketable securities.

How do you interpret interest coverage ratio?

Intuitively, a lower ratio indicates that less operating profits are available to meet interest payments and that the company is more vulnerable to volatile interest rates. Therefore, a higher interest coverage ratio indicates stronger financial health – the company is more capable of meeting interest obligations.