Interest Coverage Ratio
The ratio of earnings before interest and taxes for a particular reporting perid to the amount of interest charges for the period. The ratio is one measure of the ability of a company to service its debts in relation to its financial charges. The ratio is a rough measure of financial risk, depending upon the payment schedule of the debt and the average interest rate. The assessment of financial risk can be improved when the coverage ratio is considered in connection with the cash flow ability of the firm to service debt. Investment services companies make extensive use of interest coverage ratios.
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