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Chapter 19
Debt and gearing ratios
In addition to the gearing ratios seen in the capital structure chapter, the following
ratios are also useful.
3.1 Interest cover
Interest cover is a measure of the adequacy of a company’s profits
relative to its interest payments on its debt.
Operating profit before interest and tax
Interest cover = ––––––––––––––––––––––––––––––––
Debt interest
The lower the cover, the greater the risk that profit will become
insufficient to cover interest payments.
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