Walking on thin ice

As interest rates rise, companies with a low interest-coverage ratio are likely to be in a difficult situation

- Karthik Anand Vijay

Over the past few months, central banks have increased interest rates to rein in inflation. And by the looks of it, they are going to continue doing so. This will lead to a rise in interest expense for borrowers. Consequently, companies with a low-interest coverage ratio will be in a spot.

The interest-coverage ratio is used to evaluate a company's interest-paying ability. It is an important metric and especially so in a rising-interest-rate environment. It is calculated as follows: