Interest Coverage Ratio
The Interest Coverage Ratio (ICR) is a financial metric used to measure a company’s ability to meet its debt obligations. It is calculated by dividing a company’s earnings before interest and taxes (EBIT) by its interest expenses for a given period. A higher ICR indicates that a company is more likely to be able to meet its debt obligations, while a lower ICR indicates that a company may be at risk of defaulting on its debt.
The ICR is an important metric for investors and creditors, as it provides an indication of a company’s financial health. It is also used by lenders to determine the amount of debt a company can take on. A company with a higher ICR is more likely to be able to borrow money at a lower interest rate, as lenders view it as a lower risk.
The ICR has been used for many years as a measure of a company’s financial health. It was first introduced in the early 1900s by the American Bankers Association as a way to measure a company’s ability to pay its debts. Since then, it has become a widely used metric in the financial industry.
Comparison Table
| Company | EBIT | Interest Expenses | Interest Coverage Ratio |
|---|---|---|---|
| Company A | $1,000,000 | $200,000 | 5 |
| Company B | $500,000 | $100,000 | 5 |
As can be seen from the table above, both Company A and Company B have an ICR of 5, indicating that they are both able to meet their debt obligations. However, Company A has a higher EBIT and is therefore more likely to be able to borrow money at a lower interest rate.
Summary
The Interest Coverage Ratio is an important financial metric used to measure a company’s ability to meet its debt obligations. It is calculated by dividing a company’s earnings before interest and taxes (EBIT) by its interest expenses for a given period. A higher ICR indicates that a company is more likely to be able to meet its debt obligations, while a lower ICR indicates that a company may be at risk of defaulting on its debt. For more information about the ICR, investors and creditors can visit websites such as Investopedia and The Balance.
See Also
- Debt-to-Equity Ratio
- Debt Service Coverage Ratio
- Cash Flow Coverage Ratio
- Return on Equity
- Return on Assets
- Gross Profit Margin
- Net Profit Margin
- Earnings Per Share
- Price-to-Earnings Ratio
- Price-to-Book Ratio
