The interest coverage ratio is a measurement of a company’s ability to deal with its overdue debt. This is one of a series of debt indicators that can be used to assess the financial condition of the company. A good interest coverage ratio is important for market analysts and investors, since the company can’t grow, and may not even be able to survive if he can’t pay the interest on existing obligations to creditors. The term “coating” refers to the length of time (usually the number of financial years) for which interest payments can be made with currently available revenue. A company that has a very large income of the Bank for the amount needed to pay interest on its debt more financial cushion against a temporary decline of income. The company barely able to meet their interest commitments from current earnings is in a very difficult financial position because even a slight, temporary dip in income may render it financially insolvent.
The interest coverage ratio is not achieved by a simple calculation; divide the profit before interest and tax (ebit) in the amount of, to pay interest on all of the company’s debts to creditors. For example, if the company’s profit before tax and interest amount of up to$ 50,000, and its requirements interest total 25,000$, the interest coverage ratio of the company-2.
What is a good percentage of coverage varies not only between industries but also between companies in the same industry. As a rule, the interest coverage ratio of at least 2 is the minimum amount for a company that has a solid, stable income, such as the energy company. Analysts prefer to see a coverage ratio of 3 or better. In contrast, the coverage ratio below 1 indicates the company cannot meet its current obligations for the payment of interest and, therefore, is not in good financial condition.