This ratio, also called fixed-charge coverage, measures a company's ability to handle debt service, i.e. the degree of protection creditors have from a default on interest payment.
Net interest coverage is calculated by taking into account interest expense net of interest income, whereas Interest coverage is based on interest expense only.
Net interest coverage is calculated by taking into account interest expense net of interest income, whereas Interest coverage is based on interest expense only.
EBIT / Net interest expense
Gearing measures, such as Total debt/Total equity, have to be analysed together with interest coverage ratios in order to get a clear picture of a company's debt-related risk.
Of course, Total debt/Total equity should be analysed together with Interest coverage, whereas Net Debt/Total equity should be analysed together with Net interest coverage.
For example, a company showing a strong and recurring operating margin can cope with a higher level of debt than a company operating in a highly cyclical business with low margins.
The nature of the business and the management efficiency directly impact the EBIT number while the level of debt, reflecting financial policy and interest rates, results into the amount of interest expense.
Of course, Total debt/Total equity should be analysed together with Interest coverage, whereas Net Debt/Total equity should be analysed together with Net interest coverage.
For example, a company showing a strong and recurring operating margin can cope with a higher level of debt than a company operating in a highly cyclical business with low margins.
The nature of the business and the management efficiency directly impact the EBIT number while the level of debt, reflecting financial policy and interest rates, results into the amount of interest expense.
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