Interest cover

Interest cover is an affordability test. It compares the profit before tax (PBT) figure to interest charged in the profit and loss account.

If you plan to lend money to someone, you want to know they will be able to pay you back. The interest cover ratio (also known as the debt service ratio) is one way to measure the ability of a company to continue to meet its interest payments on any debt it has incurred.

The interest cover ratio matters to equity investors because shareholders are the last in the queue in terms of claims on assets if a company goes bust. If a company is struggling to repay its debts then any ongoing dividend payments are likely to come under threat as resources are diverted to repay creditors.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free
https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up
MoneyWeek

MoneyWeek is written by a team of experienced and award-winning journalists, plus expert columnists. As well as daily digital news and features, MoneyWeek also publishes a weekly magazine, covering investing and personal finance. From share tips, pensions, gold to practical investment tips - we provide a round-up to help you make money and keep it.