Horizon.my

Interest cover is a company’s EBIT divided by its Net Interest Expense. For example take a company has EBIT of RM100 million per year. Let’s say its Interest Income is RM3 million while Interest Expense is RM13 million. That means its Net Interest Expense is RM10 million. Therefore Interest Cover is 10 times.

This is a good indicator of the company’s ability to service its debts. If Interest Cover is too low, then a company could find it difficult to service its loans if earnings take a small dip.

To apply this concept, just think in terms of how much salary you earn (before tax) and how much interest you pay the bank on your loans (eg housing loan & car loan). Say you earn RM10,000 per month and the interest element on your loans total RM2,000. Your Interest Cover is 5 times and it is still quite comfortable.

But say you are only earning RM2,000 per month and your interest expense is RM1,000, your Interest Cover is only 2 times and this is obviously not a very comfortable position to be in.