Pension Funds and Taxation
With the passage of time, more and more pension funds are moving from a state-controlled pension fund regime to one in which pension funds are managed privately. Hence, every government needs a mechanism to promote investment in pension funds. Preferential tax treatments are one of the most important ways in which governments can encourage people […]
Market Indicators For Commodities Investing
All kinds of investing is driven by market sentiment. These sentiments in turn are driven by certain market indicators. Investors and traders are often glued to these indicators. The markets get particularly volatile when information pertaining to these market indicators is released. Every type of market has its own set of indicators. Some indicators overlap […]
The Role of Commercial Banks In Liquidity Management
Due to increasing globalization in the world economy, a lot of multinational corporations today have their businesses spread out across several geographies. This creates several management problems for multinational companies. Not only do they have to struggle with the complexity of managing personnel and operations in many countries but they also have to ensure proper […]
Advantages of Title Sponsorship
In the previous article, we have already understood the meaning of title sponsorship. We also know why it is one of the most coveted forms of sponsorships. We are aware of some of the prominent disadvantages associated with title sponsorship. However, it needs to be understood that there are more advantages to title sponsorship as […]
Payment Mechanisms in Public-Private Partnerships
In every public-private partnership, it is the job of the public party to provide remuneration to the private party. There are various mechanisms in which this payment can be provided. In this article, we will discuss the mechanisms which are commonly used in public-private partnerships. User Charges User charges are a commonly used mechanism when […]
The interest coverage ratio is a number that has a lot of importance for the creditors of the firm. This number tells them how safe their investments are and how likely they are to get back principal and interest on time.
Interest Coverage Ratio = EBIT / Interest
The interest coverage ratio tells investors how many rupees they have made in profit, per rupee of interest that they owe to their shareholders. Thus if the interest coverage ratio is 3, then the firm has 3 rupees in profit for every 1 rupee in interest obligations. Thus profits will have to fall by more than 66% for the firm to register a loss.
The standard assumption of no accounting manipulation in either of the two numbers involved (EBIT and Interest expenses in this case) is made while calculating the interest coverage ratio.
On the other hand, companies with highly variable sales, like technology and apparel companies, need to have a high interest coverage ratio. These industries are prone to wild fluctuations is sales and investors want to ensure that their cash flow is not interrupted as a result. Hence they demand a higher interest coverage ratio before they give out their money.
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