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Chapter 18

6.3 Interest cover

Interest cover is normally considered at the same time as gearing. Like the gearing
ratio, interest cover helps users of financial statements to assess financial risk.
Interest cover is a measure of the number of times that operating profit is able to
‘cover’ the interest payments due on long-term loans. It provides lenders with an idea
of the level of security for payments due to them.

Interest cover is calculated as follows:

Operating profit
Finance costs = times

Tutor notes guidance – discussion points

Discuss with students possible explanations for changes in both ratios.

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