An interest coverage ratio measures the capabilities of the company to pay interest on its debts at a specific time. The interest coverage ratio indicates how many times a company can pay interest in a particular period. It only calculates the ability of a company to pay interest, not the principal amount.
The potential investor used this ratio to determine a risk connected with a company and the profitability of the company, and the investor checks whether a company is able to pay its due on time without impact on its profitability.
The interest coverage ratio may be calculated by dividing a company's EBIT by the total interest expense. When the interest coverage ratio is smaller than 1, that means the company does not have enough cash or is not able to make interest payments. When the interest coverage ratio falls below 2.5 is a warning sign for the company.
The formula for calculating the interest coverage ratio is as follows:
Interest Coverage Ratio = EBIT / Interest Expense
What can you do with Interest Coverage Ratio Calculator?
- It helps to calculate interest coverage ratio and helps to measure profitability of your company.
- Users can see the accurate value of the interest coverage ratio.
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