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Simple English definitions for legal terms
interest-coverage ratio
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A quick definition of interest-coverage ratio:
Interest-Coverage Ratio: The interest-coverage ratio is a way to measure how much money a company makes compared to how much it owes in interest payments. It is calculated by dividing a company's pretax earnings by the amount of interest it pays on its loans and bonds each year. This ratio helps investors and lenders understand how easily a company can pay its debts and whether it is a good investment or not.
A more thorough explanation:
The interest-coverage ratio is a financial metric that measures a company's ability to pay its interest expenses on outstanding debt. It is calculated by dividing a company's earnings before interest and taxes (EBIT) by its interest expenses.
For example, if a company has an EBIT of $1 million and pays $200,000 in annual interest expenses, its interest-coverage ratio would be 5x ($1 million / $200,000).
A higher interest-coverage ratio indicates that a company is more capable of meeting its interest obligations and is therefore considered less risky by lenders and investors. Conversely, a lower interest-coverage ratio suggests that a company may struggle to make its interest payments and could be at risk of defaulting on its debt.
Overall, the interest-coverage ratio is an important measure of a company's financial health and is closely monitored by analysts and investors.