How do interest coverage ratios relate to gearing?

Interest coverage ratios and gearing are both financial metrics that assess a company's financial stability and its ability to meet its debt obligations.

Interest coverage ratios measure a company's ability to pay its interest expenses on outstanding debt. It is calculated by dividing a company's earnings before interest and taxes (EBIT) by its interest expenses. A higher ratio indicates that the company is more capable of meeting its interest obligations. If the ratio is less than 1, it means the company's earnings are not sufficient to cover its interest expenses, which could lead to financial distress.

On the other hand, gearing, also known as leverage, is a measure of a company's financial risk. It shows the proportion of the company's capital that is financed by debt. A higher gearing ratio indicates a higher level of debt relative to equity, which means the company is more reliant on borrowed money to finance its operations. This can be risky as the company has to pay interest on this debt, and failure to do so can lead to bankruptcy.

The relationship between interest coverage ratios and gearing is that they both assess a company's financial risk and its ability to meet its debt obligations. A company with a high gearing ratio will likely have a lower interest coverage ratio, as it has more debt and therefore more interest to pay. Conversely, a company with a low gearing ratio will likely have a higher interest coverage ratio, as it has less debt and therefore less interest to pay.

In summary, both interest coverage ratios and gearing are important indicators of a company's financial health. They provide valuable insights into the company's financial stability and its ability to meet its debt obligations. Therefore, they should be carefully considered by investors and other stakeholders when evaluating a company's financial performance.