English Deutsch Français Italiano Español Português 繁體中文 Bahasa Indonesia Tiếng Việt ภาษาไทย
All categories

"...The Interest Coverage Ratio compares the last 12-month’s earnings (before deducting interest and taxes) to interest payments over the same period. For example, a ratio of three means that earnings were triple the interest payments over the past 12-months. "

Are the interest payments referenced above, being paid just for interest on oustanding debt, or payment made for both interest and principal outstanding?

Why is this ratio important? I'm having trouble applying this to a real world scenario. Thanks.

2007-03-13 07:16:23 · 2 answers · asked by flytoohighz 1 in Social Science Economics

2 answers

The higher the ratio is, the less likely it is that the company will fail to pay the interest in the future, when it's profits change.

More broadly, it shows whether the profit rate that the company earns is above the interest rate that it pays.

Interest coverage does not cover principal payments.
The safety of principal is described by debt-to-equity or debt-to-assets ratios. Justification is that if company goes bankrupt, assets are sold to pay off the debts.

2007-03-13 07:58:26 · answer #1 · answered by Anonymous · 0 0

I guess this ratio is important because it allows you to determine if you are able to cover the cost of your debt. As you say, the ratio shows the number of times that you can pay your debt expenses, that is, the interest only, and not the repayment of outstanding debt.

2007-03-13 15:18:13 · answer #2 · answered by Daedalus Omega 6 · 0 0

fedest.com, questions and answers