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Coverage Ratio Formula:
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The Coverage Ratio, also known as Interest Coverage Ratio, measures a company's ability to pay interest expenses on outstanding debt. It indicates how many times a company can cover its interest payments with its earnings before interest and taxes (EBIT).
The calculator uses the Coverage Ratio formula:
Where:
Explanation: The ratio shows how easily a company can pay interest expenses from operating earnings. Higher ratios indicate better financial health and lower default risk.
Details: Lenders and investors use this ratio to assess a company's financial risk. A low coverage ratio may indicate potential difficulty in meeting debt obligations, while a high ratio suggests strong financial stability.
Tips: Enter EBIT and Interest Expense in USD. Both values must be positive, with Interest Expense greater than zero for valid calculation.
Q1: What is considered a good Coverage Ratio?
A: Generally, a ratio above 1.5 is acceptable, above 2.0 is good, and above 3.0 is excellent. However, this varies by industry.
Q2: What does a Coverage Ratio below 1 mean?
A: A ratio below 1 indicates that the company's EBIT is insufficient to cover its interest expenses, signaling potential financial distress.
Q3: How often should Coverage Ratio be calculated?
A: It should be calculated quarterly and annually as part of regular financial analysis and when considering new debt financing.
Q4: Are there limitations to this ratio?
A: Yes, it doesn't consider principal repayments, varies by industry, and can be affected by accounting methods and one-time items.
Q5: How does Coverage Ratio differ from Debt Service Coverage Ratio?
A: Coverage Ratio only considers interest expenses, while Debt Service Coverage Ratio includes both interest and principal repayments.