Financial Ratio Analysis
The Leverage Ratios
1.Interest Coverage Ratio
2. Debt to Equity Ratio
3. Debt to Asset Ratio
4. Financial Leverage Ratio
Interest Coverage Ratio:
The interest coverage ratio is also referred to as debt service ratio or the debt service coverage ratio. The interest coverage ratio helps us understand how much the company is earning relative to the interest burden of the company. This ratio helps us interpret how easily a company can pay its interest payments. For example, if the company has an interest burden of Rs.100 versus an income of Rs.400, then we clearly know that the company has sufficient funds to service its debt.
However, a low-interest coverage ratio could mean a higher debt burden and a greater possibility of bankruptcy or default.
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