Interest Coverage Ratio
Understanding the interest coverage ratio
The interest coverage ratio (ICR) - a crucial financial metric used to measure a company's capability to manage its debt obligations - provides insight into a company's financial health and ability to repay its debt.
Calculating the interest coverage ratio
The interest coverage ratio (ICR), determined by dividing a company's earnings before interest and taxes (EBIT) by its interest expenses, is pivotal for investors to assess a company's risk profile and its capacity to meet debt obligations.
Significance of the interest coverage ratio
The interest coverage ratio significantly influences investors and creditors, as it reveals a company's capacity to cover interest payments. A higher ICR suggests the company can easily meet its debt obligations, indicating a healthy financial status.
Interest coverage ratio vs. Debt coverage ratio
Differentiating between the ICR and Debt Coverage Ratio, the ICR evaluates how much EBIT is available to cover interest payments, while the Debt Coverage Ratio gauges how much cash flow is accessible to cover debt payments, making it a more conservative metric.
Interest coverage ratio vs. Times interest earned ratio
Comparing the ICR and the Times Interest Earned Ratio, the ICR measures a company's ability to cover interest expenses, while the latter assesses the company's ability to cover debt, taking into account operating income.
Interest coverage ratio vs. EBIT ratio
The ICR is a measure of a company's ability to repay its debt, while the EBIT ratio evaluates a company's profitability based on dividing EBIT by its revenue.
Interest coverage ratio vs. EBITDA to EV ratio
While the ICR focuses on a company's capacity to pay its debt, the EBITDA to EV Ratio assesses the company's ability to pay debt and create value for shareholders.
Relevance of IC ratio and TIER
The IC ratio, based on EBIT to interest expenses, focuses on paying interest, while the TIER considers a company's capability to pay its debt. Additionally, the TIER factors in a company's earnings, unlike the IC ratio.
