Question

The interest coverage ratio is defined as EBITDA/Interest Expense. a. What does an interest coverage ratio...

The interest coverage ratio is defined as EBITDA/Interest Expense.

a. What does an interest coverage ratio greater than 1.0X mean? What does 1.8X mean?

  1. Why are interest coverage ratios computed pretax?
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Answer #1

Interest coverage ratio represents the company's ability to meet its interest payment obligations. High the ratio, better it is.

a.Interest coverage Ratio greater than 1.0X means that earnings greater than interest expense are available for paying interest.

1.8X means that earnings before paying interest are 1.8 times of interest expense

b.Interest coverage ratios are computed pre-tax because interest payments are allowed to be deducted from income before calculating tax. Hence, the relevant figures for calculation are the pre-tax figures.

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