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Interest Coverage Ratio

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Overview Of The Concept Of Interest Coverage Ratio

An important trend seen within the framework of the modern-day business world is the fact that the different business enterprises are increasingly taking bank loans or debts for the enhancement of the scope of their business. However, the major problem arises because of the fact that many enterprises fail to repay the debts or the bank loans in a timely manner which in turn adversely affects their brand image and business prospects. The concept of Interest Coverage Ratio becomes an important one in this regard.

Interest Coverage Ratio is also called by the name of Times interest earned (TIE) and is considered to be one of the most important parameters through which the ability of an enterprise to honour or repay its debts or loans is being measured. Thus, the different bank accountants and others are increasingly taking the help of this metric for the effective analysis of the ability of the enterprises to repay the debts or the loans that they have taken.

What Is The Definition Of Interest Coverage Ratio?

Interest Coverage Ratio in simple terms can be seen as a parameter or a metric which is being used to assess the capability as well as the ability of a particular business enterprise to respect or for that matter repay the bank loans or debts that it had taken. More importantly, the tool of Interest Coverage Ratio becomes important when the ability of a particular enterprise to repay or honour its debts is being analysed or judged. Furthermore, for the purpose of deriving this ratio, the earnings of an enterprise before taxes or interests is being divided by the total amount of interests or capital that the concerned enterprise needs to pay for the debt.

If the result of this calculation is less than the number 1 then this signifies the fact that the concerned enterprise is not generating enough revenue to repay the debts that it had taken in a timely manner. On the other hand, if the result of the calculation is more than 1 then this indicates the fact that the enterprise is generating enough revenue to repay its debts in a timely manner as agreed.   

Is Interest Coverage Ratio The Same As Times Interest Earned?

Interest Coverage Ratio and Times interest earned (TIE) are the same things and the names of the same framework although in different contexts or scenarios different names are being used. As a matter of fact, both of these two frameworks are indicative of the fact whether or not a particular business enterprise is capable enough to repay or for that matter honour the debts or the loans that it had taken.

How Interest Coverage Ratio/ Times Interest Earned Works?

Interest Coverage Ratio works in a rather simplistic manner and for the purpose of calculating it the business enterprises are required to take into account the interest expenses of their enterprise and also their earnings before the actual payment of the taxes or the interests. In this regard, it needs to be said that the value of the ratio determines whether or not a particular enterprise actually has the capability or the ability to repay the loans or the debts. For example, if the value of the ratio is more than 1 then this means that the enterprise would be able to repay the debts or the loans through its revenue and if it is less than 1 then this means that the enterprise would not be able to do so.   

What Is The Interest Coverage Ratio Formula?

The formula for the calculation of the Interest Coverage Ratio is fairly simple and the concerned ratio can be easily calculated through the usage of the below given equation-

Interest Coverage Ratio= EBIT/Interest Expense

Wherein EBIT represents “Earnings before interest and taxes”

How To Calculate Interest Coverage Ratio?

For calculating the Interest Coverage Ratio, the business enterprises need to divide the amount of capital that they have to spend as interest by the amount of revenue that they generate prior to the tax or the interest deductions. More importantly, the value of the ratio determines whether or not the enterprise would be able to respect its debt or loans.    

What Are The Important Books On Interest Coverage Ratio/ Times Interest Earned?

Some of the important books on Interest Coverage Ratio or Times Interest Earned are listed below-

  1. Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet by Axel Tracy
  2. Interpreting and Analyzing Financial Statements by Karen P Schoenebeck
  3. The Vest-Pocket Guide to Business Ratios by Michael R Tyran
  4. Financial Statement Analysis: A Practitioner’s Guide by Martin S Fridson
  5. Key Management Ratios: Master the Management Metrics That Drive and Control Your Business by Ciaran Walsh

How Our Expert Can Help With Interest Coverage Ratio/ Times Interest Earned Topics?

The assignment related to Interest Coverage Ratio or Times interest earned (TIE) are often complex as well as tricky in nature. The resultant effect of this is that the students often find it very difficult to either complete them or for that matter submit them within the deadline which had been provided to them by their educational institution. It is precisely here that the services offered by our experts become important since they not only help the students to complete these assignments but also offer them the much-needed guidance as well.

Our qualified professional experts are well adept at handling different kinds of assignments, be it essays, reports, dissertations and others related to the concerned topic. Furthermore, they have vast experience in dealing with assignments related to Times interest earned (TIE) or Interest Coverage Ratios and have helped many students to get good grades. In addition to these, the assignments completed by our experts are being thoroughly proofread so as to ensure that the final assignment offered to the students is free from typing or grammatical errors. Furthermore, our experts also follow a 0% plagiarism policy which ensures that the students are being able to get quality grades for their assignments 

Bibliography

  1. “Times interest earned ratio”. Retrieved from https://www.accountingtools.com/articles/what-is-the-times-interest-earned-ratio.html
  2. “Times Interest Earned (TIE)”. Retrieved from https://www.investopedia.com/terms/t/tie.asp
  3. “What is interest coverage ratio”. Retrieved from https://economictimes.indiatimes.com/markets/stocks/news/explaining-interest-coverage-ratio/articleshow/58800553.cms?from=mdr

Mark Hales

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