CFA Level I · CFA Level I Exam · Financial Analysis Techniques
An analyst reports the following for a company: EBIT of 480, interest expense of 80, and total debt of 1,000. The interest coverage ratio (EBIT / interest expense) is closest to:
The interest coverage ratio is 6.0 times, found by dividing EBIT of 480 by interest expense of 80. It shows how many times operating earnings cover interest payments. Using total debt or inverting the fraction gives incorrect figures.
- A0.17
- B6.0Correct
- C12.5
Explanation
Interest coverage = EBIT / interest expense = 480 / 80 = 6.0. The value 0.17 is the inverse (80/480), and 12.5 is 1,000/80, which uses total debt instead of EBIT.
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