Interest Coverage Ratio

The Formula looks like this (earnings before taxes) / (interest expenses)

The lower the ratio the harder it is for a company to pays its debt. As a general rule interest coverage ratio below 1.5 does not make a good investment. This would signal a company may be having trouble paying down its debt and could go into bankruptcy if times get hard.

If the ratio is below 1 that means currently the company is unable to pay its bills. Investing in a company like this would mean investing in a company that is losing money.

An airline will need to take out more loans to buy jets and other large purchases then another company which does not need to buy all of those expensive items before taking up shop. For that reason it is a good idea to compare the company with other similar companies in the same industry group to get an idea of how well off they really are.

As always combining this ratio together with other similar ratios is a good way to tell how strong a given company is and how great of an investment they will become in the future.

Other Financial Indicators

Here are some other financial indicators that people use in order to gage the strength of a given company.

PE Ratio - This looks at the earnings of the company and compares it to the price of the company

Net Present Value - Takes inflation into consideration.

Net Profit Margin - This ratio is used to determine a company’s profitability