A liquidity and solvency ratio that probes a company’s ability to pay the interest on its debt. It relates cash flow from operations (in addition to interest and taxes paid) to interest payments:
This ratio uses cash basis not accrual basis to cover interest, which makes more useful than its closest counterpart, the times interest earned (TIE) ratio. For example, if the financial statements of a given company are showing that it has $30,000 in cash flow from operations, $3,000 in interest payment and $4,000 in taxes, then:
cash interest coverage ratio= (30,000+ 3,000+1,000)/3,000 = 11.33
This company is able to cover every dollar of interest with 11.33 dollars in cash flow.
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