What do you mean by Interest Coverage Ratio? What does it indicate?
Interest Coverage Ratio indicate protection available to the lenders of long term capital in the form of funds available to the lenders of long term capital in the form of funds available to pay the interest charges. Thus, it is a very important ratio from the lender’s point of view. It is an index of the financial strength of an enterprise. A high ratio is desirable but too high ratio may indicate under utilization of the borrowing capacity of the organization whereas too low ratio may indicate excessive long term borrowings.
Formula to calculate Interest Coverage Ratio = Profit before interest and taxes (PBIT)/ Interest Charges