Corporate Financial Analysis and Debt Repayment Capacity Indicators: Interest Coverage Ratio and Related Indicators

Interest Coverage Ratio

It is an important indicator in corporate financial analysis. This indicator, which divides operating income by interest expense, is used to evaluate a company's debt repayment ability. The formula for calculating it 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 4 times its interest expense, indicating that it has a high debt repayment capacity. Generally, an interest coverage ratio of 3 or more is considered a stable level, while an interest coverage ratio of less than 1.5 is considered risky.

Introduction of 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 health.

Explanation of Debt Ratio, Equity Capital Ratio, and Current Ratio for Corporate Financial Health

Debt Ratio:

The value obtained by dividing total liabilities by total assets, indicating that a lower ratio represents higher financial health and lower risk.

Equity Capital Ratio:

The value obtained by dividing equity by total assets. A higher ratio indicates a higher level of securing own funds, while a lower ratio indicates an increased dependence on external funds.

Current Ratio:

The value obtained by dividing current assets by current liabilities. A higher ratio indicates a higher short-term debt repayment capacity, while a lower ratio increases the risk of bankruptcy.

These indicators are used together in corporate financial analysis, and investors should carefully consider them.