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Interest Coverage Ratio (ICR) is a financial metric used to assess a company's ability to meet its interest payments on outstanding debt. By measuring the proportion of a company's earnings available to cover interest expenses, ICR provides insights into a business's financial health and stability. In this article, we'll show how to calculate Coverage Ratio, discuss its importance, and suggest strategies for improvement.
Here's the Interest Coverage Ratio formula:
ICR = EBIT / Interest Expenses
Let's consider a real-world example of a retail company, such as a clothing store. We'll use the following data to calculate the Interest Coverage Ratio:
Calculate the Interest Coverage Ratio (ICR) using the formula:
ICR = EBIT / Interest Expenses
ICR = $300,000 / $30,000
ICR = 10
In this example, the Interest Coverage Ratio of 10 means that the retail company has 10 times the earnings needed to cover its interest expenses.
Interest Coverage Ratio (ICR) is an important financial metric for several reasons:
Here are some strategies that can help improve your Interest Coverage Ratio:
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