Question 2.5: Assess Global’s ability to meet its interest obligations by ...
Assess Global’s ability to meet its interest obligations by calculating interest coverage ratios using both EBIT and EBITDA.
PLAN AND ORGANIZE
Gather the EBIT, depreciation, and amortization and interest expense for each year from Global’s income statement.
2015: EBIT = 7.1, EBITDA = 7.1 + 1.1, Interest expense = 4.6
2016: EBIT = 10.4, EBITDA = 10.4 + 1.2, Interest expense = 7.7
EXECUTE
In 2015 and 2016, Global had the following interest coverage ratios:
2015: \frac{EBIT}{Interest} = \frac{7.1}{4.6} = 1.54 and \frac{EBITDA}{Interest} = \frac{7.1 + 1.1}{4.6} = 1.78
2016: \frac{EBIT}{Interest} = \frac{10.4}{7.7} = 1.35 and \frac{EBITDA}{Interest} = \frac{10.4 + 1.2}{7.7} = 1.51
EVALUATE
The coverage ratios indicate that Global is generating enough cash to cover its interest obligations. However, Global’s low—and declining—interest coverage could be a source of concern for its creditors.