Interest Coverage = EBITDA ÷ Interest Expense
Indicates what portion of debt interest is covered by a company's cash flow situation.
Things to remember
- A ratio under 1 means that the company is having problems generating enough cash flow to pay its interest expenses.
- Ideally you want the ratio to be over 1.5.
Interest Coverage Analysis:
If you will notice, Cory's Tequila Co. doesn't have any long term debt - therefore you will not find an interest expense. What a great position to be in, practically debt free. Companies with a ratio below 1 could run into serious trouble servicing its loan payments and are considered to be in high risk of defaulting. Because Cory's Tequila Co. has no interest expense its interest coverage ratio is infinite...obviously the best you could possibly have.