Interest Coverage Ratio
Definition
A measure of how comfortably a business can pay interest on its debt from operating profit. A higher ratio means more cushion; a ratio near one signals that earnings barely cover interest.
Formula
Interest coverage = EBIT ÷ Interest expense
Related Terms in Financial Analysis
Debt Service Coverage Ratio (DSCR)
A measure lenders use to see whether operating income covers total debt obligations, including principal and interest. A DSCR above one means income exceeds debt payments.
Inventory Turnover Ratio
How many times a business sells and replaces its inventory over a period. A higher turnover generally indicates strong sales or lean stock, while a low figure may signal overstocking or slow demand.
Asset Turnover Ratio
Revenue generated per unit of total assets, measuring how efficiently a business uses its assets to produce sales. It is especially relevant for asset-heavy industries.
Cash Conversion Cycle
The number of days it takes a business to turn cash spent on inventory back into cash from customers. It combines days inventory outstanding and days sales outstanding, less days payable outstanding.
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