How does ‘Interest coverage ratio’ affects the capital structure.

The interest coverage ratio refers to the number of times earnings before interest and taxes of a company covers the interest obligations.

Interest coverage ratio = EBIT/Interest

Higher the ratio, better is the position of the firm to pay its interest obligations, so

it should issue debt. On the other hand if it is low, the firm should avoid using debt as

interest is to be paid irrespective of profits.

Sanisha Maharjan
Jan 16, 2022
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