Cash interest cover

A company's ability to pay interest due to its creditors is often measured using interest cover. However interest cover is calculated using accounting profits, which may not accurately reflect the actual amount of cash inflows a company makes its interest payments out of.

Cash interest cover uses operating cash flow rather than EBIT, and net interest paid (interest paid minus interest received) as shown by the cash flow statement instead of interest payable. It is:

operating cash flow ÷interest paid

Cash interest cover avoids some of the weaknesses of the P & L based interest cover, but has its own.

For example, if interest is incurred but the actual payment is delayed, then the cash interest cover may appear much better or worse than the real picture due to this lumpiness. Cash interest cover is probably best used as a supplement to interest cover rather than a substitute.

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