Interest Coverage Ratio

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Definition of 'Interest Coverage Ratio'

The interest coverage ratio (ICR) is a financial ratio that measures a company's ability to pay its interest expenses. It is calculated by dividing a company's earnings before interest and taxes (EBIT) by its interest expenses.

A high interest coverage ratio indicates that a company is generating enough cash flow to cover its interest payments. This is considered to be a sign of financial strength. A low interest coverage ratio, on the other hand, indicates that a company may have difficulty meeting its interest payments. This could be a sign of financial weakness.

The interest coverage ratio is a useful tool for investors and creditors to assess a company's financial health. It can help investors determine whether a company is a good investment and it can help creditors assess the risk of lending money to a company.

The interest coverage ratio is calculated as follows:

**Interest Coverage Ratio = EBIT / Interest Expenses**


* EBIT = Earnings before interest and taxes
* Interest Expenses = Interest paid on debt

The interest coverage ratio is typically expressed as a number of times. For example, a company with an interest coverage ratio of 2.0 is able to cover its interest expenses two times over.

The interest coverage ratio is a useful tool for comparing companies within the same industry. However, it is important to note that the interest coverage ratio can be affected by a number of factors, including:

* The company's debt structure
* The company's operating income
* The company's tax rate

As a result, it is important to consider these factors when interpreting the interest coverage ratio.

The interest coverage ratio is a valuable tool for assessing a company's financial health. However, it is important to use the ratio in conjunction with other financial metrics to get a complete picture of a company's financial situation.

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