Fashion Business | Finance & Management Control | Term 1

Lesson 5

Financial Ratios and Fundamentals

Umberto Gori | Academic Year 2020/2021

Fashion Business | Finance & Management Control | Term 1

LEVERAGE RATIOS 2

COVERAGE RATIOS

Umberto Gori | Academic Year 2020/2021

Fashion Business | Finance & Management Control | Term 1

COVERAGE RATIOS

Interest Coverage Ratio

where:
EBIT is the company’s operating profit (Earnings
Before Interest and Taxes)
Interest expense represents the interest payable
on any borrowings (such as bonds, loans, lines of
credit, etc.)

Umberto Gori | Academic Year 2020/2021

 Fashion Business | Finance & Management Control | Term 1

A company's interest coverage ratio determines

whether it can pay off its debts.
The ratio is calculated by dividing EBIT by the
company's interest expense—the higher the ratio,
the more poised it is to pay its debts.
Creditors can use the ratio to decide whether they
will lend to the company.
A lower ratio may be unattractive to investors
because it may mean the company is not poised for
growth.

Umberto Gori | Academic Year 2020/2021

 Fashion Business | Finance & Management Control | Term 1

Debt Service Coverage Ratio (DSCR)

The debt service coverage ratio (DSCR) measures how

well a company is able to pay its entire debt service. Debt
service includes all principal and interest payments due to
be made in the near term. The ratio is defined as:

DSCR = Net Operating Income(EBIT) / Total Debt Service

A ratio of one or above is indicative that a company generates

sufficient earnings to completely cover its debt obligations.

Umberto Gori | Academic Year 2020/2021

 Fashion Business | Finance & Management Control | Term 1

Debt-Service Coverage Ratio (DSCR)

The debt service coverage ratio (DSCR) measures how

well a company is able to pay its entire debt service. Debt
service includes all principal and interest payments due to
be made in the near term. The ratio is defined as:

DSCR = Net Operating Income(EBIT) / Total Debt Service

A ratio of one or above is indicative that a company generates

sufficient earnings to completely cover its debt obligations.

Umberto Gori | Academic Year 2020/2021

DSCR -rapporto di copertura del servizio del debito
Il servizio del debito è il denaro necessario per rimborsare il capitale e gli interessi
del debito in essere per un determinato periodo di tempo.

Il rapporto del servizio del debito è uno strumento utilizzato per valutare la leva
finanziaria di un'azienda.

Gli istituti di credito sono interessati a sapere che un'azienda è in grado di coprire il
carico di debito attuale oltre a qualsiasi potenziale nuovo debito.

Al fine di sostenere un elevato carico di debito, un'azienda deve generare profitti

coerenti e affidabili per il servizio del debito.