Interest Coverage Ratio
factor.formula
Interest coverage ratio = EBITDA (TTM) / Interest expense (TTM)
In the formula:
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Earnings Before Interest and Taxes for the last 12 months. Earnings Before Interest and Taxes is the profit of a company before paying interest and taxes, reflecting the profitability of its core business. Using TTM (Trailing Twelve Months) data can more accurately reflect the company's recent profitability.
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Interest expense in the last 12 months. This indicator refers to the interest expense incurred by a company due to debt financing, which usually includes the interest expense in financial expenses minus the interest income, reflecting the actual expenditure of the company on debt. The use of TTM data is also to reflect the company's recent interest expense status.
factor.explanation
The interest coverage ratio reflects the ability of a company to pay interest using its profitability (earnings before interest and taxes). The higher the ratio, the stronger the company's ability to pay interest, the more robust its financial structure, and the lower the debt risk it faces. Generally, a higher interest coverage ratio is seen as a safer and more robust financial signal, indicating that the company has sufficient profits to cover its debt interest, thereby reducing the risk of default. Investors and creditors usually focus on this indicator to assess the credit risk of a company.