Interest Coverage RatioThe interest coverage ratio is used to determine a company’s ability to pay its expenses. It takes into consideration the interest a company pays on its debt.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.
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