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Interest Coverage is a measure of a company's ability to make its interest payments using income generated by the business. Creditors are especially interested in this measure of interest coverage since it is a good indicator of whether or not a company will be able to meet future interest obligations through continuing operations.
The calculation of interest coverage is:
Operating Income / Annual Interest Expense
As a general rule, the interest coverage ratio should be around 3 or higher. If this ratio falls below 1, it is an indication that a company may default on its loans.
Other forms of this term include - coverage ratio |
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