These 5 Stocks Flaunt Impressive Interest Coverage Ratio
Zacks Investment Research | Aug 31, 2017 09:13PM ET
You can simply arrive at a decision to Buy or Sell a particular stock by looking at its sales and earnings numbers. But such a strategy does not always guarantee superior returns. A critical analysis of the company’s financial background is always required for a better investment decision.
A company’s fundamentals should be sound enough to meet its financial obligations. This can be judged with coverage ratios — the higher these are the more efficient an enterprise will be in meeting its financial obligations. Here we have discussed one such ratio — the Interest Coverage Ratio.
Interest Coverage Ratio = Earnings before Interest & Taxes (EBIT) divided by Interest Expense.
Why Interest Coverage Ratio?
Interest Coverage Ratio is used to determine how effectively a company can pay the interest charged on its debt.
Debt, which is crucial for most of the companies to finance operations, comes at a cost called interest. Interest expense has a direct bearing on the profitability of a company and the company’s creditworthiness depends on how effectively it meets its interest obligations. Therefore, Interest Coverage Ratio is one of the important criteria to factor in before making any investment decision.
Interest Coverage Ratio suggests the number of times the interest could be paid from earnings and also gauges the margin of safety a firm carries for paying interest.
An interest coverage ratio lower than 1.0 implies that the company is unable to fulfill its interest obligations and could default on repaying debt. A company that is capable of generating earnings well above its interest expense can withstand financial hardship. Definitely, one should also track the company’s past performance to determine whether the interest coverage ratio has improved or worsened over a period of time.
What’s the Strategy?
Apart from having an Interest Coverage Ratio that is more than the industry average, adding a favorable Zacks Rank and a Zacks Investment Research
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