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What is Interest Coverage Ratio

Solvency ratio is one of the ratios which are used to measure the company’s ability to meet its loan or debt obligations. This ratio indicates how well the company has handled its creditors and banks and whether the credit facility it enjoys will survive or not. Interest Coverage ratio is one of the important solvency ratios in understanding the financial health of the company. Let us discuss about it:

Interest Coverage Ratio

This ratio shows how efficient is a company in redeeming interest expenses on their outstanding debts. Interest Coverage ratio is calculated by dividing a company’s earnings before interest (EBIT) by the company’s interest expenses for the same period.

Impact of Interest Coverage Ratio

The lower the company’s Interest Coverage ratio the higher is its debt burden. When this ratio is lower than 1.5 or equal then its ability to meet interest expenses is doubtful. 1.5 is considered as the minimum acceptable coverage ratio for a company. If it is below 1.5 then the lenders are likely to refuse to lend to the company more money as the company’s risk for default becomes high. Thus the higher the Interest coverage ratio the higher is the chances of the company to pare its debt obligations. Thus Banks and NBFC’s generally lend to companies having higher interest coverage ratio as their chances of default is very rare.

Formula

Interest coverage ratio = EBIT / Interest expenses

Company ABC’s EBIT is Rs. 15, 00,000 and its total interest expenses accounts for Rs. 10,00,000 then using the formula of Interest coverage ratio (1500000/1000000) we get 1.5

We don’t have to calculate Interest coverage ratio on our own. StockEdge gives Interest coverage ratio of the last five years of any company listed in the stock exchange. We can look and compare the Interest coverage ratio of any company and filter out stocks accordingly with its inbuilt scan option.

Suppose we want to look at the Interest coverage ratio of Manappuram Finance Ltd. of last 5 years. In the Fundamental tab of Manappuram Finance Ltd., click on the fundamental tab, we will get Ratios tab.  Then in the Ratios tab click on Solvency Ratios, Interest coverage ratio will come of Manappuram Finance Ltd.

ICR

Bottomline

Only looking at the single interest coverage ratio can tell a great deal about the company’s financial position. By analyzing this ratio one can get a clear picture about the company’s financial health. These parameters are freely available under every stock in stockedge. Thus don’t wait to download our app if you haven’t downloaded as yet. We also have a paid featured scans based on Solvency, with the help of these ready-made scans you can with a click of a button filter out good companies.  These scans are part of the premium offerings of StockEdge app.

Click here to know more https://www.stockedge.com/Plans/basicmembership.

 

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