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Interest Coverage Ratio:
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Background Information
What does Interest Coverage Ratio mean?
The interest coverage ratio measures a firm’s ability to make interest payments on its debt in a timely way.
Formula
Interest Coverage Ratio = EBIT / Interest Expense
Example
A company has earnings before interest and taxes $50,000 the interest and taxes are $15,000 and $5,000 respectively. According to the above formula, the Interest Coverage Ratio is 3.33.
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