Interest Coverage Ratio
A ratio of a company's EBIT to its total expenses from interest payments. The interest coverage ratio measures the company's ability to make interest payments, such as in its debt service. A ratio above one indicates that the company is able to pay its interest, while a ratio below one means that its interest payments exceed its earnings.
Times Interest Earned
A measure of a company's ability to service its debts. It is calculated by dividing the company's earnings before interest and taxes by the total interest payable on its debts, expressed as a ratio. Investors prefer publicly-traded companies to have a middling times-interest-earned ratio. A low ratio indicates an inability to service debts, while too high a ratio indicates a lack of debt that investors may find undesirable.
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A measure of a firm's ability to meet required interest obligations. A high coverage ratio indicates enhanced ability to make timely interest payments. Interest coverage is calculated by dividing the firm's operating income by its required interest payments. Also called times interest earned. Compare fixed-charge coverage. See also debt management ratio.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.