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Interest Coverage Ratio

Concepts Behind Interest Coverage Ratio

In any concern, there is the possibility of debts being borrowed for the business. Interest should be paid by the business management regularly. This interest, calculated by the debtors should be paid by the business from its income as part of its debts payable. Therefore, the Interest Coverage Ratio is deemed to be the debts coverage ratio as it enables to repay the accrued debts by the concern and increases the credibility ratio of the entrepreneurs.

Interest Coverage Ratio is also calculated and derived based on the income levels of the company; using the available earning by the company, the interests are paid, and this is scheduled as per the statutes of the company. The solvency of a company is based on the Interest Coverage Ratio in terms of the returns payable as interest for the debts obtained and in turn that determines the dividends paid to shareholders. The timely approach of a business concern to repay its debts determines its financial stability and bears the goodwill of its debtors and investors. The investors of the company scrutinize the position of the business techniques of the concern through its Interest Coverage Ratio and examine the possibilities of investment or shares purchase.

For example, to calculate the Interest Coverage Ratio of a company which exhibits quarterly income of $125000 and liability of $20000 and assuming that the interest for the debts is paid on quarterly basis, the Interest Coverage Ratio could be determined as follows

Interest Coverage Ratio = 125000/(20000x3)
                                            = 125000/60000
                                            = 2.08

However, if the company is not able to maintain this ratio and returnable interest is not sufficient, then the company will delve into further debts by borrowing more funds to maintain the cash inflow and perpetuate the interests to be paid for the debts.

The Interest Coverage Ratio provides a clear picture of the company to its investors and creditors. From the point of view of investors, the manner in which the debts are repaid controls the manageability of the company and the interests of the investors is considered to be maintained better. In case of creditors, the credibility of the company is adjudged by them through analyzing the Interest Coverage Ratio which ensures that the debts possessed by the company are paid without any default.

Depending on the value of the Interest Coverage Ratio, the debt burden as expenses will either decrease or increase. If the Interest Coverage Ratio is low, then the debt burden will be more and vice versa. If the Interest Coverage Ratio is less than one then, it indicates that the company is facing problems regarding the returns on borrowings and that it is not able to clear its debt, meaning that the debt margin is on the rise, causing the company to either borrow more to compensate for the less income and it becomes a vicious cycle, ultimately leading the company to bankruptcy.

Difficulties Encountered In Interest Coverage Ratio

The main problem for the students is the difficult calculation of the Interest Coverage Ratio as they have to accurately determine the Income of the business and relate it to the debts payable, calculating it for a quarterly or some basis, and then obtaining a ratio of the total income and the repayment of debts. In addition to it, if the students are not aware of the Interest Coverage Ratio's implications for any company, they may not be able to provide a clear picture of the concern in terms of its share prices and the goodwill of the share holders and creditors, which is again based on the Interest Coverage Ratio which in turn determines the performance of the company.

Help With Interest Coverage Ratio Assignment - Homework

The underlying difficulties of the students in calculating the Interest Coverage Ratio should be deciphered clearly by those who offer guidance to the students, with online sources being the best means of incorporating information in a convenient manner and improving the competency of the students. However, the main problem with regards to many online service providers are that they are highly inefficient with solving problems based on accounting systems, especially in Interest Coverage Ratio and through their wrong methods, will misguide the students and decrease their capacity to understand things. This should not be encouraged by the students and choice of better websites is the initial protocol in obtaining information for assignment and homework problems, so that the reputation of the students are not spoilt in schools, where it is essential to submit quality work. Therefore, utmost care is essential to select the best service provider who has interests in the field of accounting and is bent upon providing valid and authentic information.

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