Interest cover and Liquidity: Difference between pages

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From a whole-firm perspective, interest cover is the ratio of Profit before interest and tax ÷ Interest payable.
Interest cover measures the safety or sustainability of the future debt servicing flows, from the perspective of the lenders. 


The greater the interest cover ratio, the greater the likelihood that the firm paying the debt interest (and other debt servicing costs) will continue to be able to service the debt in the future.  So a higher cover ratio is associated with lower risk for the debt investors.
An asset's ability to be turned into cash quickly and without significant loss compared with current market value.


In the theoretical situation where the cover ratio fell below 1.0, the interest would be said to be ''uncovered'' and the debt would not be sustainable at its previous level unless there was a recovery in the firm's operating profitability.


In practice lenders want much higher minimum interest cover ratios than 1.0, such higher minimum usually stipulated in the related loan documentation. So the borrower in this situation would be likely to be already in breach of a related borrowings covenant.
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An entity’s ability to pay its obligations when they fall due, especially in the short term.
 
 
3.  
 
An entity's ability to source additional funds to meet its obligations, including in the medium and longer term.
 
 
4.  


Also known as the Interest cover ratio.
A financial measure designed to quantify an entity's ability to meet its obligations when they fall due.
* For non-financial organisations, simple measures of liquidity include the ''current ratio'' and the ''quick ratio''.
* For banks and other financial institutions, liquidity measures include those which identify how long the bank could survive if wholesale funds were to dry up and retail funding was heavily stressed. This period is known as the ''survival period''.


2.
An analogous measure, in relation to an individual tranche or class of debt (rather than to the whole firm).


== See also ==
== See also ==
* [[Cost of financial distress]]
* [[Authorisation]]
* [[Covenant]]
* [[Authority limits]]
* [[Cover ratio]]
* [[Cash and cash equivalents]]
* [[Profit before interest and tax]]
* [[Cash forecasting]]
* [[Uncovered]]
* [[Cash pool]]
* [[Current ratio]]
* [[Deep market]]
* [[Funding]]
* [[Headroom target]]
* [[Illiquid]]
* [[Liquidate]]
* [[Liquidation]]
* [[Liquidity buffer]]
* [[Liquidity Coverage Ratio]]
* [[Liquidity preference]]
* [[Liquidity management]]
* [[Liquidity premium]]
* [[Liquidity risk]]
* [[Money management]]
* [[Net Stable Funding Ratio]]
* [[Quick ratio]]
* [[Run]]
* [[Security]]
* [[Solvency]]
* [[Stress]]
* [[Supply chain finance]]
* [[Survival period]]
* [[CertICM]]
* [[Yield]]
 
 
=== Other resources ===
*[[Media:2015_06_June_-_Safety_first.pdf| Safety first, The Treasurer, 2015]]


[[Category:Liquidity_management]]

Revision as of 11:53, 17 November 2016

1.

An asset's ability to be turned into cash quickly and without significant loss compared with current market value.


2.

An entity’s ability to pay its obligations when they fall due, especially in the short term.


3.

An entity's ability to source additional funds to meet its obligations, including in the medium and longer term.


4.

A financial measure designed to quantify an entity's ability to meet its obligations when they fall due.

  • For non-financial organisations, simple measures of liquidity include the current ratio and the quick ratio.
  • For banks and other financial institutions, liquidity measures include those which identify how long the bank could survive if wholesale funds were to dry up and retail funding was heavily stressed. This period is known as the survival period.


See also


Other resources

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