Listen to a Business English Dialogue About Interest coverage
Gabriella: Hey Eden, have you ever heard of interest coverage?
Eden: Hi Gabriella! Yes, interest coverage measures a company’s ability to pay its interest expenses on its outstanding debt.
Gabriella: Right, it’s calculated by dividing a company’s earnings before interest and taxes (EBIT) by its interest expenses.
Eden: Exactly. A higher interest coverage ratio indicates that a company is more capable of meeting its interest obligations.
Gabriella: That’s correct. It’s an important metric for investors and creditors to assess a company’s financial health and risk level.
Eden: Definitely. Companies with a higher interest coverage ratio are generally considered less risky investments.
Gabriella: Yes, because they have more earnings available to cover their interest expenses, reducing the likelihood of default.
Eden: Absolutely. It’s also important for companies to maintain a healthy interest coverage ratio to ensure they can continue borrowing at favorable rates.
Gabriella: Right. A low interest coverage ratio may indicate that a company is struggling to generate enough earnings to cover its debt obligations.
Eden: Exactly. So, investors and creditors often use this ratio as a key indicator of a company’s financial stability and risk profile.
Gabriella: Yes, it provides valuable insight into a company’s ability to manage its debt and sustain its operations over the long term.
Eden: Agreed. Monitoring the interest coverage ratio can help investors make informed decisions about where to allocate their capital.