Interest Coverage Ratio

The last of the leverage ratios isn’t really a pure leverage indicator but augments the debt ratio. Debt requires the payment of interest and so an indicator of the ability to pay this interest is needed. This is the interest coverage ratio. It basically identifies how many times earnings can pay the interest required by existing debt. The formula consists of a denominator which is the interest paid in the current year and a numerator of earnings before interest, taxes, depreciation and amortization (EBITDA). The formula is:

Interest Coverage Ratio = Earnings Before Interest, Taxes, Deprec. & Amort. 
                                                       Interest Paid

For a user of this ratio, the most difficult element is understanding the EBITDA value. This article starts out by examining the earnings aspect and its effect on the ratio. Once EBITDA

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