Published on 5 Apr 2023 on Zacks via Yahoo Finance

Pick These 4 Stocks With Impressive Interest Coverage Ratio

An ill-informed investor can lose cash if he wagers on a stock only on the basis of the numbers flashing on a real-time stock screen. A critical analysis of the company’s financial background is always required for a better investment decision, especially at a time when the stock market is juggling myriad issues, such as soaring inflation, supply chain bottlenecks and a hawkish monetary policy.Often, investors evaluate a company’s performance by simply looking at its sales and earnings, which sometimes do not reveal the real picture. To be more precise, they do not tell whether a company’s fundamentals are sound enough to meet its financial obligations. Here, the coverage ratio comes into play — the higher the metric, the more efficient an enterprise will be in meeting its financial obligations.

Why Interest Coverage Ratio?

The interest coverage ratio is used to determine how effectively a company can pay interest charges on its debt.Debt, which is crucial to financing operations for the majority of companies, comes at a cost called interest. Interest expense has a direct bearing on the profitability of a company. The company’s creditworthiness depends on how effectively it meets its interest obligations. Therefore, Interest Coverage Ratio is one of the important criteria to factor in before making any investment decision.Interest Coverage Ratio = Earnings before Interest & Taxes (EBIT) divided by Interest Expense.Interest Coverage Ratio suggests how many times the interest could be paid from earnings and gauges the margin of safety a firm has for paying interest.An interest coverage ratio lower than one suggests that the company is unable to fulfill its interest obligations and could default on repaying debt. A company capable of generating earnings well above its interest expense can withstand financial hardships. One should also track the company’s past performance to determine whether the interest coverage ratio has improved or worsened over a period of time.Caterpillar Inc. CAT, United Rentals, Inc. URI, Fortinet, Inc. FTNT and ExlService Holdings, Inc. EXLS boast an impressive interest coverage ratio.