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Corporate Financial Analysis and Debt Repayment Ability Indicators: Interest Coverage Ratio and Related Indicators
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Summarized by durumis AI
- The interest coverage ratio is an indicator that shows a company's ability to repay interest expenses, calculated by dividing operating profit by interest expenses.
- In addition to the interest coverage ratio, there are various other indicators that reflect a company's financial soundness, such as debt ratio, equity ratio, and current ratio.
- Investors should comprehensively analyze these financial indicators to accurately assess a company's financial status and make investment decisions.
Interest Coverage Ratio
It is an important indicator in corporate financial analysis. This indicator, which divides operating income by interest expense, is used to assess a company's ability to repay its debt. The formula for calculating this is as follows.
Interest Coverage Ratio = (Net Income + Interest Expense + Income Tax Expense) / Interest Expense
For example, if Company B's net income is 50 billion won, interest expense is 20 billion won, and income tax expense is 10 billion won, then Company B's interest coverage ratio is as follows.
Interest Coverage Ratio = (50 + 20 + 10) / 20 = 4
This shows that Company B has operating income equivalent to four times its interest expense, indicating that it has a high ability to repay debt. Generally, an interest coverage ratio of 3 or more is considered stable, and an interest coverage ratio of less than 1.5 is considered risky.
Introduction to key financial indicators for interest coverage ratio and debt repayment ability
In addition to the interest coverage ratio, debt repayment ability indicators are also important. In other words, you should also check the following indicators for corporate financial soundness.
Explanation of debt ratio, equity capital ratio, and current ratio for corporate financial soundness
Debt Ratio:
This is the value obtained by dividing total debt by total assets, and a lower ratio indicates higher financial soundness and lower risk.
Equity Capital Ratio:
This is the value obtained by dividing equity capital by total assets, and a higher ratio indicates a higher level of self-financing, while a lower ratio indicates an increased reliance on external financing.
Current Ratio:
This is the value obtained by dividing current assets by current liabilities, and a higher ratio indicates a higher ability to repay short-term debt, while a lower ratio indicates a higher risk of bankruptcy.
These indicators are used together in corporate financial analysis, and investors should carefully consider them.
