You already know How to calculate the interest payment ratio? Accurate and fastest? In today's modern life, there are times when you will need to borrow an urgent amount of money to spend. How to choose the right loan with a reasonable interest rate.
Learn the formula in the article below to help you calculate the most accurate interest coverage ratio.
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What is the Interest Coverage Ratio?
Interest Coverage Ratio English name is Interest Coverage Ratio, also known as loan interest payment ratio. This is an indicator that shows the ability of a business to pay interest on debt. In addition, through this financial indicator, you can see the financial capacity of the business created to cover the cost of borrowing capital for production business activities.
The interest payment ratio is calculated on the debt ratio and the rate of return to help determine the financial ability of a company to pay interest on its outstanding debts.
Alternatively, the interest coverage ratio can be calculated by dividing the company's earnings before interest and taxes (EBIT) over a given period of the company's interest payments. term at the same time. (Refer to documents at Investopedia).
Formula for Calculating Loan Interest Coverage Ratio
The formula of the fastest and most accurate interest coverage ratio is:
Loan interest payment ratio = (Pre-tax profit + Debt interest)/ Debt interest
To better understand the above calculation formula, taking for example the data of ABC Joint Stock Company, the company's debt interest payment coefficient will be shown as follows:
Table of debt interest payment coefficients
| Targets | Year X1 | Year X0 |
| Profit before tax (million) | 1.010 | 880 |
| Loan interest (million) | 215 | 205 |
| Total (million) | 1.225 | 1.085 |
| Loan interest payment ratio | 5.70 | 5.29 |
Based on the above report of ABC joint stock company, the interest payment ratio of the company falls between 5.29 and 5.7. These are quite high indicators, which shows that business activities have good signs, generating positive cash flows. Over the years, the index is quite high, proving that ABC company has a fairly positive ability to pay interest on loans.
As another specific example, Enterprise A has a profit before tax and interest of VND 80 billion and annual interest expense of VND 30 billion. According to the above formula for calculating loan interest payment ratio:
Interest payment ratio = 80 billion VND / 30 billion VND = 2.67 VND
From the above calculation results, we can see that the income of the business is 2.7 times higher than the cost of paying interest. This is also a positive sign about the ability of the business to pay interest on debt. This also shows that enterprise A is doing very well in production and business, generating good cash flows.
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Meaning of Interest Coverage Ratio
What is the meaning of the interest coverage ratio? From these debt interest payment ratios, what further comments can we make about the financial capacity of a company?
Normally, for professional economic and market analysts, from the interest payment ratio of a business can analyze to the ability to pay interest on that business. At the same time, analyzing the changes in the business activities of the enterprise is also very important.
When analyzing the financial position of a company, you need to compare the ratios over the years. The higher the interest payment ratio, the better sign the enterprise's ability to pay interest payments is.
Economists choose a coefficient of 2 as the benchmark to assess that possibility. If the interest payment ratio is far from the coefficient of 2, the business is having financial problems and the ability to pay the interest on its own is very low.
Based on these loan interest payment coefficients, information on solvency, business performance, working cash flow, etc. of an enterprise at a certain time will be clearly displayed. under the eyes of economic analysts, investors.
In addition, by analyzing these ratios, investors gain insight into the business' past performance and potential future trends in interest payments. get a loan.
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Conclude
The above is the most accurate formula for calculating the interest payment ratio to help investors, economic analysts analyze the financial ability to pay interest on loans of any business. Hope this article provides you with useful information.
Information edited by: banktop.vn
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