| Compares the amount of interest paid by a company on its borrowings (net of any income from interest-bearing deposits) with its operating profit in the same period. It is calculated by dividing operating profits by net interest payments. For example, a company that has operating profits of œ4m and pays net interest of œ1m has interest cover of 4. The ratio shows the impact of gearing on a companys profit and loss account. If the figure is low, a small reduction in operating profits, or a rise in the cost of borrowing, can wipe out pre-tax profits.
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