Cash Interest Coverage Ratio

The Cash Interest Coverage Ratio is used by creditors to assess a firm’s ability to pay interest. It is calculated by summing CFOA, interest payments, and tax payments and then dividing by interest payments. Interest and tax payments are added to CFOA because they have been subtracted in the calculation of CFOA and because those payments are available to cover interest. In particular, tax payments are added because in the unfortunate case of zero profitability, those payments would not be made and would provide another measure of relief for the creditors. Interest and taxes paid are usually summarized at the bottom of the statement of cash flows.

Cash interest coverage = ( CFOA + Interest paid + Taxes paid) / Interest paid

The cash interest coverage ratio reflects how many times greater cash provided by operations is than the interest payment itself. Creditors prefer high levels of this ratio. Altron’s 1997 cash interest coverage ratio is 4,168% or 41.68 to 1:

Cash interest coverage = ( CFOA + Interest paid + Taxes paid) / Interest paid

$14,428  $533  $7,256

$533

= 4,168%

 

This ratio is quite high and should provide creditors with considerable assurance that Altron is currently generating more than enough cash to meet its interest payments.

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