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What Is Interest Cover?

moneyInterest cover is a measure of the ability of a company to pay the interest on its loans. It is calculated simply by dividing a company’s profits before interest and tax by its interest costs. Typically, an interest cover of 1.5 would suggest that a company should be able to meet its interest payments easily.

Loans can be a useful way for a business to boost returns for shareholders. However, a business should be able to meet its interest payments easily to avoid falling into financial difficulties. Consequently, investors should check interest cover because interest payments are an obligation and not an option.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.