How do you find the coverage ratio?
The ratio, also known as the times interest earned ratio, is defined as:
- Interest Coverage Ratio = EBIT / Interest Expense.
- DSCR = Net Operating Income / Total Debt Service.
- Asset Coverage Ratio = Total Assets – Short-term Liabilities / Total Debt.
What is distribution coverage ratio?
Distribution Coverage means the ratio determined by dividing Distributable Cash Flow of the Partnership for the quarter by Total Distributions of the Partnership for the quarter.
Is a higher interest coverage ratio better?
Generally, a higher coverage ratio is better, although the ideal ratio may vary by industry.
What is acceptable debt service coverage ratio?
A debt service coverage ratio of 1 or above indicates that a company is generating sufficient operating income to cover its annual debt and interest payments. As a general rule of thumb, an ideal ratio is 2 or higher. A ratio that high suggests that the company is capable of taking on more debt.
Is a higher or lower interest coverage ratio better?
Intuitively, a lower ratio indicates that less operating profits are available to meet interest payments and that the company is more vulnerable to volatile interest rates. Therefore, a higher interest coverage ratio indicates stronger financial health – the company is more capable of meeting interest obligations.
Is a higher or lower debt service coverage ratio better?
As a general rule of thumb, an ideal ratio is 2 or higher. A ratio that high suggests that the company is capable of taking on more debt. A ratio of less than 1 is not optimal because it reflects the company’s inability to service its current debt obligations with operating income alone.
What is a bad interest coverage ratio?
A bad interest coverage ratio is any number below 1, as this translates to the company’s current earnings being insufficient to service its outstanding debt.
What is a good Ebitda coverage ratio?
A ratio greater than 1 indicates that the company has more than enough interest coverage to pay off its interest expenses. Because EBITDA does not account for depreciation-related expenses, a ratio of 1.25 might not be a definitive indicator of financial durability.