The coverage ratio is a financial metric used to measure a company’s ability to pay the interest on its debt. A higher coverage ratio indicates that a company is more capable of meeting its interest obligations from its operating earnings. It is a key indicator of financial stability and is closely monitored by creditors and investors.
The formula to calculate the coverage ratio is:
\[ CR = \frac{EBIT}{IE} \]
Where:
Let's assume the following values:
Using the formula:
\[ CR = \frac{100000}{20000} = 5 \]
The coverage ratio is 5.
