Markets · 6 pages · 12 min

How interest coverage is a breathing room

Interest coverage compares earnings available to pay interest with the interest the firm is obliged to pay.

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From the opening

Interest coverage compares a measure of earnings, before the interest itself, with the interest the firm must pay on its debt. The comparison describes breathing room, how far earnings can shrink before they no longer cover the contractual interest, rather than a grade of the firm's general virtue. The opening covers earnings compared with interest, the gap is the room, and principal is a separate test.

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Inside

Earnings compared with interest
The gap is the room
Principal is a separate test
A peak year overstates room
Where the idea stops applying
A distinction worth keeping

Sources

Interest coverage ratio
Fixed charge coverage

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How interest coverage is a breathing room

From the opening

Inside

Sources

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