What is a coverage ratio?

Thus, coverage ratios appear in many forms that can be molded and applied, conforming to the situation’s demands. Expanding the statement above, it means that a company or an organization can change the constituents of the ratio to use according to the purpose demands. They could also be crucial in determining a company's future standing present.

What is interest coverage ratio (ICR)?

Interest Coverage Ratio (ICR) = Earnings Before Interest and Taxes (EBIT) / Interest Expense Key Components Earnings Before Interest and Taxes (EBIT): This figure represents a company’s operating profit before accounting for interest and taxes. It reflects the company’s ability to generate income from its core operations.

What are common coverage ratios?

Common coverage ratios include the Interest Service Coverage Ratio (ISCR), Debt Service Coverage Ratio (DSCR), Asset Coverage Ratio (ACR), and Cash Flow Coverage Ratio (CFCR). These ratios are essential for lenders, creditors, and investors to evaluate a company's creditworthiness and financial stability.