Why are interest coverage ratios typically computed on a pretax basis?
What will be an ideal response?
Interest coverage ratios are typically computed on a pretax basis because interest payments are a pretax expense. Because interest payments lower a company's taxes there is no need to adjust the interest payment for taxes to get an after-tax accounting of its effect. Pretax interest coverage ratio is calculated by dividing pretax income plus interest charges by total interest charges. The higher this ratio, the lower the credit risk, all other factors the same.
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