How do you calculate interest cover?

Also known as Times Interest Earned, this is the ratio of Operating Income for the most recent year divided by the Total Non-Operating Interest Expense, Net for the same period.

If Total Interest Expense, Net for the period is less or equal 0 (i.e. the equivalent of Interest Income), then we set Interest Coverage to a value of 100x - this is somewhat arbitrary but it ensures that these companies will also pass a high interest coverage screen.

If a company is loss-making, we still calculate this ratio - the figure will therefore be negative.

What about Operating Interest Expense?

Like Thomson Reuters, we define Interest Expense based on Non-Operating Interest Expense only. Interest expense is typically classified as a a non-operating expense when it is not part of a company's main operations. For example, a retailer's main operations are the purchasing and sale of merchandise, and a manufacturer's main operations are the production and sale of goods. Neither the retailer nor the manufacturer has as its main operations the borrowing and lending of money, whereas a bank's main operations involves interest expense on its depositors' savings accounts and interest revenues on its loans.

Should I use interest expense for banks?

No, this item is not meaningful for Banks and Insurance companies. This ratio works well when looking at manufacturing businesses, utilities, and certain service businesses. It should be used with care when analysing financial service companies because their business models borrow differently from traditional manufacturing and service businesses.