9

Financial strength

This chapter reviews measures of financial strength:

  • Interest cover
  • Debt to equity ratio
  • Leverage

By ‘financial strength’ we mean a company’s ability to withstand operating setbacks. In the previous chapter we looked at the short-term position. The long-term situation is even more important.

big_icon Interest cover

This ratio is derived solely from the profit and loss account. It measures a company’s ability to service its borrowings.

The ‘interest’ charge is divided into the ‘EBIT’ figure to give the ‘cover’ expressed as ‘so many times’.

Three factors determine the level of ‘interest cover:

  • the operating profit
  • the total amount ...

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