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Interest Coverage Ratio
Source:
Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority and you can order
it here)
The ratio
of earnings before interest and taxes for a particular reporting perid
to the amount of interest charges for the period.
The ratio is one measure of the ability of a company to service
its debts in relation to its financial charges.
The ratio is a rough measure of financial risk, depending upon
the payment schedule of the debt and the average interest rate.
The assessment of financial risk can be improved when the coverage
ratio is considered in connection with the cash flow ability of the firm
to service debt. Investment
services companies make extensive use of interest coverage ratios.
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