Financial Metrics - Coverage Ratios

Sustainable growth of a company requires adequate coverage to meet future obligations.  A key ratio is times interest earned to show how many times earnings will cover fixed-interest payments on long term debt.

EBIT / I = Times Interest Earned Ratio

EBIT = earnings before interest and taxes
I = dollar amount of interest payable on debt

The Total Coverage Ratio goes one step further than times interest earned, because debt obliges the borrower to not only pay interest but make payments on principle as well.

(EBIT / I) + (s / (1-h)) = Total Coverage Ratio

I = interest payments
s = payment on principle figured on income after taxes (1-h)

Popular Posts