What is Interest Coverage Ratio

 

The Interest Coverage ratio (ICR) can be used to calculate how well a company will pay the interest on its pending debts. The ICR can be used by investors, creditors and investors to determine whether a company is able to repay its capital. The "times interest earn" ratio, also known as the ICR, is used to determine how risky a company's lending capital.

The higher the interest coverage ratio, the more the company is in debt. A lower ratio suggests that the company has less operating income available to cover interest payments and is more vulnerable. A higher percentage of interest coverage is a sign that the company is in better financial health . The company is more likely to be able to pay its interest obligations.

A high ratio can also mean that a company may not be taking advantage of leverage to enhance their earnings. An ICR greater than 2 would be unacceptable for companies that generate consistent revenues and cash flow. Analysts might prefer an ICR greater than 3. An ICR of less than 1 means poor financial health. If the ICR is lower than 1, it indicates that the company cannot meet its short-term obligations.

 

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