EDU Articles

Learn about investing, trading, retirement, banking, personal finance and more.

Ad is loading...
Help CenterFind Your WayBuy/Sell Daily ProductsIntraday ProductsFAQ
Expert's OpinionsBest StocksInvestingTradingCryptoArtificial Intelligence
IntroductionMarket AbbreviationsStock Market StatisticsThinking about Your Financial FutureSearch for AdvisorsFinancial CalculatorsFinancial MediaFederal Agencies and Programs
Investment PortfoliosModern Portfolio TheoriesInvestment StrategyPractical Portfolio Management InfoDiversificationRatingsActivities AbroadTrading Markets
Investment Terminology and InstrumentsBasicsInvestment TerminologyTrading 1 on 1BondsMutual FundsExchange Traded Funds (ETF)StocksAnnuities
Technical Analysis and TradingAnalysis BasicsTechnical IndicatorsTrading ModelsPatternsTrading OptionsTrading ForexTrading CommoditiesSpeculative Investments
Cryptocurrencies and BlockchainBlockchainBitcoinEthereumLitecoinRippleTaxes and Regulation
RetirementSocial Security BenefitsLong-Term Care InsuranceGeneral Retirement InfoHealth InsuranceMedicare and MedicaidLife InsuranceWills and Trusts
Retirement Accounts401(k) and 403(b) PlansIndividual Retirement Accounts (IRA)SEP and SIMPLE IRAsKeogh PlansMoney Purchase/Profit Sharing PlansSelf-Employed 401(k)s and 457sPension Plan RulesCash-Balance PlansThrift Savings Plans and 529 Plans and ESA
Personal FinancePersonal BankingPersonal DebtHome RelatedTax FormsSmall BusinessIncomeInvestmentsIRS Rules and PublicationsPersonal LifeMortgage
Corporate BasicsBasicsCorporate StructureCorporate FundamentalsCorporate DebtRisksEconomicsCorporate AccountingDividendsEarnings

What is the Interest Coverage Ratio?

The interest coverage ratio, also known as the debt service ratio, is a financial metric that measures a company's ability to pay its interest expenses with its earnings. Essentially, it shows how many times over a company's earnings before interest and taxes (EBIT) can cover its interest payments. This ratio is important for both investors and creditors, as it can indicate a company's ability to service its debt obligations.

To calculate the interest coverage ratio, you simply divide a company's EBIT by its interest expense. The resulting number represents the number of times the company can cover its interest payments with its current level of earnings. For example, if a company has an EBIT of $500,000 and an interest expense of $100,000, its interest coverage ratio would be 5x.

A high interest coverage ratio is generally considered favorable, as it indicates that a company has a strong ability to service its debt obligations. Conversely, a low interest coverage ratio can be a warning sign for investors and creditors, as it suggests that a company may be struggling to make its interest payments. This can be especially concerning if interest rates rise, as it would increase the company's interest expenses and further strain its ability to make payments.

It's worth noting that different industries may have different benchmarks for what constitutes a good interest coverage ratio. For example, a company in a capital-intensive industry like manufacturing may require a higher interest coverage ratio than a company in a service industry like consulting. Additionally, a company's size, growth stage, and other factors can all impact what is considered an acceptable interest coverage ratio.

Investors and creditors may also use the interest coverage ratio to compare different companies within the same industry or sector. This can help them evaluate which companies are better positioned to service their debt obligations and make more informed investment or lending decisions.

The interest coverage ratio can also be useful in forecasting a company's future financial performance. By analyzing a company's historical interest coverage ratio and comparing it to current market conditions, investors and creditors can get a sense of how a company may perform if interest rates rise or if it faces other financial challenges.

Overall, the interest coverage ratio is an important metric for understanding a company's ability to service its debt obligations. While a high interest coverage ratio is generally preferred, it's important to consider the specific context of a company's industry, size, and other factors when evaluating its ratio. By using the interest coverage ratio as part of a broader financial analysis, investors and creditors can make more informed decisions and minimize their risk exposure.

What is Earnings Before Interest, Taxes ,and Depreciation (EBITD)?

What does Earnings mean?

What are Solvency Ratios?

What is an Interest Rate?

Tickeron's Offerings

The fundamental premise of technical analysis lies in identifying recurring price patterns and trends, which can then be used to forecast the course of upcoming market trends. Our journey commenced with the development of AI-based Engines, such as the Pattern Search Engine, Real-Time Patterns, and the Trend Prediction Engine, which empower us to conduct a comprehensive analysis of market trends. We have delved into nearly all established methodologies, including price patterns, trend indicators, oscillators, and many more, by leveraging neural networks and deep historical backtests. As a consequence, we've been able to accumulate a suite of trading algorithms that collaboratively allow our AI Robots to effectively pinpoint pivotal moments of shifts in market trends.

Ad is loading...