What role does EBITDA play in interest coverage ratios?

EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, plays a crucial role in interest coverage ratios because it measures the cash available to pay interest expenses. This is important for assessing a company's financial health and ability to meet its debt obligations.

When calculating the interest coverage ratio, EBITDA is used as the numerator, providing an indication of the company's operational profitability before any financing costs are deducted. By excluding non-cash expenses like depreciation and amortization, EBITDA provides a clearer picture of cash flow available for interest payments.

In this context, a higher interest coverage ratio indicates that a company is more capable of covering its interest expenses, suggesting lower credit risk. Consequently, EBITDA serves as a pivotal component in evaluating how comfortably a company can manage its debt-related financial commitments.