debt service coverage ratio/times interest earned is also called interest guarantee multiple.

Interest guarantee multiple refers to the ratio of earnings before interest and tax to interest expense, also known as earned interest multiple, which is used to measure the ability to pay interest on loans, and it is an index to measure the ability of enterprises to pay interest on liabilities.

calculation formula of interest guarantee multiple

interest guarantee multiple = earnings before interest and tax ÷ interest expense

The numerator "earnings before interest and tax" in the formula refers to the profit before interest expense and income tax are deducted in the income statement. The denominator "interest expense" in the formula refers to all the interest payable in this period, including not only the interest expense in financial expenses, but also the capitalized interest included in the cost of fixed assets. Capitalized interest is not deducted from the income statement, but it is still repayable. The focus of interest guarantee multiple is to measure the ability of enterprises to pay interest. Without a large enough earnings before interest and tax, it will be difficult to pay interest.

the role of interest guarantee multiple

the interest guarantee multiple not only reflects the profitability of an enterprise, but also reflects the degree to which profitability can guarantee the repayment of due debts. It is not only the prerequisite for an enterprise to operate with debt, but also an important symbol to measure the long-term solvency of an enterprise. To maintain normal solvency, the interest guarantee multiple should be at least greater than 1, and the higher the ratio, the stronger the long-term solvency of the enterprise. If the interest guarantee multiple is too low, the enterprise will face the risk of loss, and the security and stability of debt repayment will decline.

application of interest guarantee multiple

in order to investigate the stability of an enterprise's ability to repay interest, the interest guarantee multiple of 5 years or more should be calculated generally. To be conservative, we should choose the lowest interest guarantee multiple value in five years as the basic interest solvency index.

With regard to the calculation of this index, we must pay attention to the following points:

(1) According to the income statement, the ability of enterprises to repay debts is analyzed. As the "numerator" of interest payment guarantee, only regular income should be included.

(2) Cumulative impact of special items (such as fire losses), suspension of operations and changes in accounting policies.

(3) Interest expense includes not only interest expense reflected as current expense, but also capitalized interest expense.

(4) The equity gains that have not received the cash bonus may be considered to be deducted.

(5) When there are subsidiaries with less than 1% equity but need to be merged, the minority equity income should not be deducted.