Interest coverage ratios

The interest coverage ratios relate the assets of the income statement and the balance sheet . These inform us about the ability of the company to meet the payment of its debt .

Knowing the degree of indebtedness of a company is of vital importance when carrying out a fundamental analysis . But knowing the level of debt is not enough, since it does not tell us anything about the company’s ability to pay. For this, the interest coverage ratios are used.

Therefore, these ratios will tell us if the company is going to be able to service its debt with the amount of income it is generating.
Interest coverage ratios, together with debt ratios, form the category known as solvency ratios.

Main interest coverage ratios

There are several ways to calculate this ratio, giving more weight to some patrimonial masses or others depending on the company and the sector. Below are some of it

Through these ratios we can know to what extent the company would be able to meet the payment of its debt. The fixed asset coverage ratio that includes leasings is of great importance when analyzing companies that have large fixed assets through leases. A clear example of this type are airlines.

Adequate levels of ratios

It is difficult to establish optimal levels of this ratio for each company. This will depend mainly on the sector, such as the characteristics of the company and its environment. In any case, in no case could this ratio be below 1. If so, the company would not be able to meet the payment of its debt. A ratio of 1.5 or higher is usually considered as an adequate reference of the company’s payment capacity both for the market and for credit institutions.

by Abdullah Sam
I’m a teacher, researcher and writer. I write about study subjects to improve the learning of college and university students. I write top Quality study notes Mostly, Tech, Games, Education, And Solutions/Tips and Tricks. I am a person who helps students to acquire knowledge, competence or virtue.

Leave a Comment