{"id":1020,"date":"2023-08-11T13:58:55","date_gmt":"2023-08-11T11:58:55","guid":{"rendered":"https:\/\/creditanalyst.eu\/?p=1020"},"modified":"2023-08-11T13:58:56","modified_gmt":"2023-08-11T11:58:56","slug":"ebitda-interest-cover-vs-ebit-interest-cover-which-one-is-better","status":"publish","type":"post","link":"https:\/\/kurtovicfinancial.com\/en\/ebitda-interest-cover-vs-ebit-interest-cover-which-one-is-better\/","title":{"rendered":"EBITDA Interest cover vs EBIT Interest cover &#8211; which one is better?"},"content":{"rendered":"\n<p>Let\u2019s look at the example of the recently bankrupted US-based trucking company Yellow Corp.<\/p>\n\n\n\n<p>Its<strong> EBITDA Interest cover ratio<\/strong> was as follows:<\/p>\n\n\n\n<ul class=\"has-black-color has-text-color wp-block-list\"><li>2019: 1,4x<\/li><li>2020: 1,1x<\/li><li>2021: 1,6x<\/li><li>2022: 1,9x<\/li><\/ul>\n\n\n\n<p><\/p>\n\n\n\n<p>Although the ratio level was generally low, the conclusion could still be that there was enough money to service at least the interest expense.<\/p>\n\n\n\n<p>And indeed, up until 2023 there was enough money to service interest payments.<\/p>\n\n\n\n<p>But, was it sustainable?<\/p>\n\n\n\n<p>Let\u2019s have a look at the <strong>EBIT Interest cover<\/strong> over the years:<\/p>\n\n\n\n<ul class=\"has-black-color has-text-color wp-block-list\"><li>2019: 0,0x<\/li><li>2020: 0,1x<\/li><li>2021: 0,7x<\/li><li>2022: 1,0x<\/li><\/ul>\n\n\n\n<p><\/p>\n\n\n\n<p>This looks much worse.<\/p>\n\n\n\n<p>The conclusion would be \u2013 no, there was not enough money to service interest expenses.<\/p>\n\n\n\n<p>And <strong>this was one of the red flags.<\/strong><\/p>\n\n\n\n<p>But, why do values of these two ratios differ that much?<\/p>\n\n\n\n<p>The reason is <strong>depreciation<\/strong>.<\/p>\n\n\n\n<p>Isn\u2019t depreciation a non-cash expense?<\/p>\n\n\n\n<p>Yes, it is, but <strong>companies operating in capital-intensive industries need to maintain their asset base to stay competitive<\/strong>. You can\u2019t be a market leader in a trucking business without investment in trucks.<\/p>\n\n\n\n<p>So, we take the<strong> depreciation as a proxy for maintenance Capex<\/strong>.<\/p>\n\n\n\n<p>_______<\/p>\n\n\n\n<p>Coming to the starting question \u2013 which one of these two ratios is better?<\/p>\n\n\n\n<p><strong>In capital-intensive industries it is much better to use EBIT Interest cover because we cannot ignore the fact that companies have to invest to stay afloat.<\/strong><\/p>\n\n\n\n<p>In other types of industries, it might be perfectly fine to use EBITDA Interest cover.<\/p>\n\n\n\n<p>_______<\/p>\n\n\n\n<p><strong>I am not a fan of any of these ratios because they only look at a very small part of a much bigger picture.<\/strong><\/p>\n\n\n\n<p>The answer whether a company covers at least interest payments is relevant mostly to those who look to invest in bullet structures, meaning they intend to stay invested for a longer period of time. You might not want to stay invested long in restructuring cases.<\/p>\n\n\n\n<p>_______<\/p>\n\n\n\n<p>These ratios lost their importance during the low interest rate era, however, this will likely change now.<\/p>\n\n\n\n<p>So, <strong>if you intend to use the ratio as a financial covenant, focus on the EBIT interest cover in capital-intensive industries.<\/strong><\/p>\n\n\n\n<p>Yes, <strong>depreciation can be manipulated, but so can EBITDA too<\/strong>.<\/p>\n\n\n\n<p>There are solutions how to define EBIT in lending agreements properly.<\/p>\n\n\n\n<p>Should you wish to know more, <strong>feel free to get in touch.<\/strong><\/p>\n\n\n\n<p>________<\/p>\n\n\n\n<p><\/p>\n\n\n\n<p class=\"has-luminous-vivid-amber-background-color has-background\"><strong>CreditAnalyst.eu &#8211; Company Analyses | Negotiations with Banks | Cash Flow Planning<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Let\u2019s look at the example of the recently bankrupted US-based trucking company Yellow Corp. Its EBITDA Interest cover ratio was as follows: 2019: 1,4x 2020: 1,1x<span class=\"excerpt-hellip\"> [\u2026]<\/span><\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[19,22],"tags":[133,47,168,123,32,59,154],"class_list":["post-1020","post","type-post","status-publish","format-standard","hentry","category-credit-guide-2","category-credit-insights","tag-cash-flow","tag-credit-analysis-2","tag-ebit-2","tag-ebitda-2","tag-financial-statements","tag-financial-statements-analysis","tag-interest-cover"],"_links":{"self":[{"href":"https:\/\/kurtovicfinancial.com\/en\/wp-json\/wp\/v2\/posts\/1020","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/kurtovicfinancial.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/kurtovicfinancial.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/kurtovicfinancial.com\/en\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/kurtovicfinancial.com\/en\/wp-json\/wp\/v2\/comments?post=1020"}],"version-history":[{"count":1,"href":"https:\/\/kurtovicfinancial.com\/en\/wp-json\/wp\/v2\/posts\/1020\/revisions"}],"predecessor-version":[{"id":1021,"href":"https:\/\/kurtovicfinancial.com\/en\/wp-json\/wp\/v2\/posts\/1020\/revisions\/1021"}],"wp:attachment":[{"href":"https:\/\/kurtovicfinancial.com\/en\/wp-json\/wp\/v2\/media?parent=1020"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/kurtovicfinancial.com\/en\/wp-json\/wp\/v2\/categories?post=1020"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/kurtovicfinancial.com\/en\/wp-json\/wp\/v2\/tags?post=1020"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}