45
as
EBIT.
To
what we
have
learnt,
lower interest coverage ratio indicates
that a company is having high debt and high possibility of going
bankrupt.
Next, Mills and Yamamura states that,
when compared
to coverage
ratio
when
compared
to
coverage
ratio,
cash
interest
coverage
ratio
shows
more
reasonable
information
of company’s
ability
to
pay
its
obligations
(interest). The following formulae can be used to calculate the ratio:
Cash Interest Coverage Ratio:
Cash Flows from operating activities+ interest paid+ taxes paid
Interest paid
Table 2.20: Calculation of cash interest coverage ratio
From: The Power of Cash Flows Ratios, 1998
Again,
according
to
Kennon
(n.d),
a
business
is
experiencing
difficulties
generating cash to pay
off
its
interest obligations if
the ratio shows below
1.0,
while
a
cash interest
coverage ratio of
1.0 show
that a company
is performing
good
as
it
merely
meets
its
obligations. Generally,
a
company
with
consistent
earnings is having low interest coverage ratio.
e)
Cash Dividend Coverage
The
cash
dividend
Coverage
ratio
represents
the
company
ability
to
fulfill
its
obligations of dividends payment from operating cash flow (Carslaw and Mills
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