Average Interest Rate
Average Interest Rate = (Interest Expense minus Accounts Payable) ÷ Liabilities
Indicates the average interest rate that a company borrows at.
Things to remember
- This is a rough estimate, the ratio does not account for everything.
- Using the before tax or after tax interest expense will produce different results.
Interest Rate Analysis:
There are several versions of this ratio. Some people prefer to just use interest bearing liabilities such as bonds and other short term loans. This formula won't give you the exact interest rate the company is paying, but it is useful in an interest rate sensitive environment. And if you compare it to previous years then you are able to tell the rate at which the company had to take on more debt. You will notice from the balance sheet above that Cory's Tequila Co. doesn't have any long term debt, therefore you will not find an interest expense. It's a great position to be in; practically debt free.