How it’s Calculated
Total Net Profit (before owners’ salaries & remuneration)
Total Interest expense
How it’s Used
Higher results show that the business is highly capable of servicing its interest expenses. Interest cost is often not reported on its own – it also includes Bank and Credit Card charges. As a result, the Interest Cover calculation can divide total net profit by the combined cost of interest and bank fees.
A second ‘Interest Cover’ ratio is also calculated (at the request of the finance industry). This second calculation adds personal interest paid by the owners (eg on home loans or personal loans etc) into the Interest expense of the business, so it shows a total capacity to cover all interest costs (this is particularly relevant in sole trader or partnerships which are not operated through a company or trust structure).
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