Interest Coverage Ratio - Meaning, Formula, Calculation & Interpretations

This in-depth tutorial guides you through the most important aspects of the Interest Coverage Ratio. You will learn what Interest Coverage Ratio is, how to calculate it, and how to interpret the results. Using the Colgate Case Study, we will also understand how to compute the Interest Coverage Ratio in Excel.
You can download the Colgate Interest Coverage Ratio template from this link - https://www.wallstreetmojo.com/ratio-...

What is Interest Coverage Ratio?
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The interest coverage ratio helps determine how many times a company's current earnings (before interest and taxes) can be used to pay interest on its outstanding debt. It can be used to determine a company's liquidity position by assessing how easily it can pay interest on its outstanding debt.

Formula
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Interest Coverage Ratio Formula = EBITDA / Interest Expense

Interpretation
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- Higher interest coverage ratio indicates that the company is better able to pay off its debts.
- If interest coverage is less than 1, it means that EBITDA will not be sufficient to pay off the debt, thus, necessitating the search for alternative sources of funding.
- Since capital-intensive companies have higher depreciation and amortization, the interest coverage ratio should be calculated using EBITDA.

For more details, you can refer to our article - https://www.wallstreetmojo.com/intere...

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