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Read the earnings-based calculation
For a fictional period with EBIT 300 and interest expense 60, coverage is 5.0×. Both figures concern the same reporting period and the specified EBIT and expense conventions.
Ask the separate cash question
Suppose much of the period’s revenue remains in receivables while interest is due earlier. The ratio does not specify the collection dates or available financing. A cash schedule would need that information.
| Question | Evidence needed |
|---|---|
| How does stated EBIT compare with interest expense? | Matching period earnings and expense |
| Can cash meet the next interest payment? | Available cash, collection dates, payment dates and financing |
Use actual covenant definitions when relevant
A contractual covenant may define earnings, interest and permitted adjustments differently. Its threshold belongs to that agreement. This example does not assign a universal safe or unsafe multiple.
Use the ratio as one analytical input
Review profitability trends, cash generation, maturities and the report’s notes before drawing a credit conclusion. The quotient is a useful summary of its inputs, not a complete solvency assessment.