Interest coverage ratios

Question 1

Interest coverage ratio

Answer 1

Measures of a firm’s ability to meet its interest payments by comparing its earnings with its interest expenses
- a higher ratio means a firm is eaning much more than necessary to meet its obligations (High quality borrowers > 5x EBIT / Interest coverage, Low quality < 1.5)

Question 2

EBIT / Interest coverage

Answer 2

EBIT / Interest expense

Question 3

EBITDA / Interest converage

Answer 3

(EBIT + Depr. + amort.) / Interest expense