interest-coverage ratio

interest-coverage ratio
A ratio that uses historical financial information. sometimes combined with projected financial information, to measure a firm's short-term credit strength. This ratio measures the firm's ability to make its required interest payments. In its simplest form, the ratio takes the firm's pretax net income plus interest expense and divides that sum by the interest expense. Interest-coverage ratios can be calculated with several variations. One variation involves using next year's projected interest expense in the denominator rather than the most recent year's actual interest expense. A second variation reduces net income by deducting nonrecurring income amounts. Other variations are in use.
Sometimes called times interest earned. American Banker Glossary

Financial and business terms. 2012.

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