L22 Lecture Notes - Lecture 5: Debt Service Coverage Ratio, Standard Deviation, Cash Flow
Document Summary
Assessing debt capacity using interest coverage and debt service coverage ratios. Interest coverage ratio is used to determine how easily a company can pay its interest expenses on outstanding borrowed amount or debt. The ratio is calculated by dividing a company"s earnings before interest and taxes (ebit) by the company"s interest expenses for the same period. Interest coverage ratio is equal to earnings before interest and taxes (ebit) for a time period, often one year, divided by interest expenses for the same time period. The interest coverage ratio is a measure of the number of times a company could make the interest payments on its debt with its ebit. Interest coverage ratio = ebit during the period /interest liability or interest burden of the period. An investor would like to ensure to see that their company can pay its bills on time without having to sacrifice its operations and profits.
