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Coverage ratios give the relationship between the financial charges of a firm and its ability to service them. The four most commonly used coverage ratios are:
EBIT interest coverage ratio
EBITDA interest coverage ratio
Funds from operations/total debt ratio
Free operating cash flow/ total debt ratio.
EBIT stands for "Earnings Before Interest and Taxs". EBIT interest coverage ratio is nothing but EBIT divided by the annual interest expenses.
EBITDA stands for "Earnings Before Interest, Taxes, Depreciation, and Amortization." The EBITDA interest coverage ratio is got by dividing EBITDA with annual interest expense.
Funds from operations includes net income plus the following: depreciation, amortization, deferred income taxes, and other non-cash items. Free operating cash flows are different from rating agency to rating agency.
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