Management Notes

Reference Notes for Management

Interest Coverage Ratio – Meaning, Formula, Uses, Types and Examples | Financial Management

Interest Coverage Ratio

Interest Coverage Ratio

An Interest Coverage Ratio (ICR) is a financial ratio that evaluates a company’s ability to repay its outstanding debt. ICRs are used by both lenders and investors to evaluate a company’s credit risk. An interest coverage ratio is also known as a “times interest earned” ratio.

Interest coverage ratios determine the risk associated with lending funds to a company, based on the ability of the company to pay the interest on its existing debt.  A high ratio indicates that a company can cover its interest expense several times over, while a low ratio indicates a company may have trouble repaying its loans. An interest coverage ratio trend line is useful for spotting situations where a company’s results or debt burden are contributing to a downward trend in the ratio.

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