Interest coverage ratio shows the ability of a firm to pay interest is not affected by tax payment, as interest debt funds is a tax-deductible expense. A high interest coverage ratio means that the firm can easily meet its interest burden even if profit before interest and taxes suffer considerable decline.
A low interest coverage ratio may result in financial embarrassment when profit before interest and taxes decline. This ratio is widely used by lenders to assess a firm’s debt capacity. Further, it is a major determinant of bond rating. Tesco’s ratio for 2005 was 51.20, 2006 was 48.72, 2007 was 54.25, 2008 was 43.49 and in 2009 it is 77.11. This growing trend is a good indication since the company’s income is good enough to pay interest of debts. This is a good sign for investors as well.
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