EBITDA to Interest coverage

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What is EBITDA to Interest coverage?

EBITDA to Interest coverage compares EBITDA to interest expenses, assessing the company’s ability to service its debt based on operating earnings.

How do you interpret EBITDA to Interest coverage?

EBITDA to Interest coverage compares EBITDA to interest expenses, assessing the company’s ability to service its debt based on operating earnings.

How to Calculate EBITDA to Interest coverage?

This ratio is calculated by dividing EBITDA by the company's interest expense.

EBITDA to Interest Coverage = EBITDA / Interest Expense

where - EBITDA represents a company’s earnings before interest, taxes, depreciation, and amortization.

• Interest Expense is the cost incurred by a company for borrowed funds.

Why is EBITDA to Interest coverage important?

It is crucial because it assesses a company’s ability to pay off its interest expenses, providing insight into its financial stability and capacity to manage debt. It is particularly relevant for creditors and investors as it measures the safety margin the company has for covering interest payments.

How does EBITDA to Interest coverage benefit investors?

Investors use this ratio to evaluate how easily a company can cover its interest obligations with operating income. A higher ratio is more attractive as it reduces the risk of default, making the company a safer investment.

Using EBITDA to Interest coverage to Evaluate Stock Performance

Companies with a higher EBITDA to Interest Coverage ratio are generally in a stronger financial position, which can positively impact stock performance. Investors favor companies with lower financial risk, and this ratio helps indicate the level of risk tied to debt servicing.

FAQ about EBITDA to Interest coverage

What is a Good EBITDA to Interest coverage?

A ratio above 3x is generally considered healthy. A higher ratio suggests a company is generating sufficient earnings to cover its interest obligations comfortably.

What Is the Difference Between Metric 1 and Metric 2?

EBITDA to Interest Coverage includes depreciation and amortization, while EBIT to Interest Coverage excludes these non-cash items. EBITDA is a more comprehensive measure of operating income before non-cash expenses.

Is it bad to have a negative EBITDA to Interest coverage?

Yes, a low ratio may indicate that the company is struggling to cover its interest payments, which could lead to financial distress or default.

What Causes EBITDA to Interest coverage to Increase?

An increase occurs when the company grows its EBITDA through higher revenues or cost efficiencies, or when interest expenses decrease due to lower debt or refinancing at lower rates.

What are the Limitations of EBITDA to Interest coverage?

EBITDA is not a cash flow measure, and the ratio does not consider principal repayments. A company could have a high EBITDA to Interest Coverage but still face liquidity issues if it is not generating enough free cash flow.

When should I not use EBITDA to Interest coverage?

This ratio may not be as relevant for companies with low or negligible debt, or in industries where non-cash items like depreciation significantly impact operating income.

How does EBITDA to Interest coverage compare across industries?

Capital-intensive industries often have lower EBITDA to Interest Coverage ratios due to higher debt levels, while industries with less capital expenditure, such as technology, typically have higher ratios​​.

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