Interest Cover: What you need to know about leveraged cos

Given the high interest rate environment, investors will be keenly watching companies’ ability to meet their interest payments. This is one data point that investors should analyze while looking at the fundamentals of a company, and the interest coverage multiple does exactly this.

The interest coverage multiple or the interest coverage ratio is calculated by dividing a company’s earnings before interest and taxes for a particular period by the company’s interest expenses for the same period.

The higher the multiple is, the better the financial position of a company.

Interest coverage multiple less than one indicates the company is not generating sufficient revenues to meet its cost of debt. A ratio above 1.5 is considered to be good. However, a good or bad multiple depends on the industry the company operates in. For instance, infrastructure and realty companies have a lot of debt on their books. But debt in itself is not a bad thing, as long as the company is able to service it

Speaking to, fundamental analyst at Kotak Securities, Dipen Shah, said “We do consider the interest coverage ratio to be an important parameter. A ratio of almost 1 or below 1 is not preferable.”

-Anisha Mappat, Riken Mehta


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