07B. Financial Leverage KPIs: Interest Coverage Ratio

Episode 7 of Building Your Multi Million Dollar Practice is our last session that digs into each KPI specifically. It is split into three parts and covers Debt to Equity, Interest Coverage, and Fixed Asset Turnover ratios. This determines how easily a company can pay the interest expenses on outstanding debt. For this calculation, you look at the earnings before interest and taxes divided by the interest expenses. The lower the ratio, the more the company is burdened by debt expenses. This is important because for certain types of businesses where you have to pay for the raw materials, like a butcher shop or grocery store, there can be a lag between when they have to pay and when they get paid. These businesses can often run into trouble with making payroll during these periods. Knowing the interest coverage ratio for these companies helps you to advise your clients in these situations on creating cash reserves. The Formula: Ebit / Interest Expense