Interest

The amount paid for the use of capital as borrowed funds is called interest. This is very similar to rent. With rent, the capital is the fixed asset and the rent is the amount of interest paid to use the fixed asset during the time period.

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.

Rule of 72

rule of 72

A quick and easy way to determine the doubling of value for a given sum based on an interest rate is the Rule of 72. This simple formula has three factors. The first is the interest rate; the second is the amount of time in years to double the value and of course the number 72.