Interest coverage ratio
Interest coverage ratio ( English debt burden level or English interest service cover ratio = ISCR) or interest load ratio are business or economic indicators that, depending on the type of debtor , are intended to reflect the ratio of a debtor's interest expenses to his income . In the case of companies , the interest coverage ratio is a key figure that shows the ratio of a debtor's interest expenses to his cash flow or annual surplus ; in the case of states , their interest expenses are set in relation to the gross national product , government expenditure or export proceeds.
General
It is a debt ratio that evaluates a debtor's debt sustainability , along with other debt ratios. The creditor can only assess his credit risk if he determines key figures such as the interest burden ratio in order to decide whether to grant a loan or to continue an existing one. All interest expenses resulting from interest-bearing liabilities are part of the quota (exceptions: interest on pension provisions , bank fees ). If the interest coverage ratio is high, there is a low credit risk and vice versa. The higher the interest coverage ratio, the easier it is for the interest expenses to be covered by the operative business. The interest coverage ratio does not only deteriorate if the debt increases, but also if the debt remains the same due to a - non-taxable - increase in the interest rate. It expresses that the interest to be borne by the debtor must be earned by him in some way.
A key figure that supplements the interest burden ratio is the debt service coverage ratio , which can also be determined for companies and countries. In addition to the interest, it also includes the repayments of loans.
Companies
Interest is an expense on the income statement and an expense is a company's liquidity . Companies with high equity capital have to bear less interest expenses than comparable companies with weak equity capital. Increases in interest rates therefore have a significantly more negative effect on companies with weak equity than on companies with strong equity ( leverage effect ). Instead of the cash flow, the EBIT is also compared with the interest payments from loans. The interest coverage ratio is calculated as follows:
An interest coverage ratio of means that the company does not make interest payments on loans from its operating business. The KfW Group has determined that the interest burden ratio of German companies is relatively high compared to the European competition, in which the relative shortage of capital is expressed. But the debtor himself also consults the interest coverage ratio, along with other key figures, when he has to make investment decisions. According to this, it has been empirically proven that companies with a high interest burden rate also have lower investment rates because debt servicing has a strong influence on investment activity. The debt situation for companies is critical - depending on the sector - when the debt service exceeds 50% of the cash flow. If these limits are not only exceeded temporarily, a company finds itself in a corporate crisis .
States
Due to the high level of indebtedness of states, their interest burden quota has come to the fore of the discussion. The budgetary interest burden ratio relates to the total public budget expenditure, while the macroeconomic interest burden ratio results from the comparison of the interest expenses with the gross domestic product. The interest coverage ratio can be subject to greater changes, since the volume of short-term debts can change quickly and the mostly variable debt interest rates can also be subject to large market fluctuations.
or
The formula shows that a state can no longer finance its imports in the amount of the interest expense from export revenues, which leads to a reduction in imports. The situation is critical for a state if the interest and repayment service exceeds 20% to 25% of the permanently achievable export revenues or reaches more than 20% of the total expenditure. If the critical limits are exceeded permanently, states can get caught in a state crisis. In the overall budget of the Federal Republic of Germany for 2012, interest expenditure is estimated at 38 billion euros with a total of 309 billion euros in total expenditure, so the interest burden ratio is 12.3% of total expenditure. Compared to the gross domestic product in 2010 (2,498.8 billion euros) that is 1.52%.
If, for example, the national debt (gross) reaches the level of the gross domestic product ( national debt ratio therefore 100%) and if the assumed interest rate is 6%, the tax revenue is 30% of the gross domestic product, the tax revenue is already burdened with 18% interest expense. After servicing the debt, the state then only has around 80% of the tax revenue for its actual public finance tasks.
Comparison of different interest rate ratios (in relation to total expenditure)
| country | 2003 | 2005 |
|---|---|---|
| Germany | 14.4% | 15.3% |
| state | 2007 | 2009 |
|---|---|---|
| Baden-Württemberg | 6.0% | ? |
| Bavaria | 2.9% | 2.7% |
| Berlin | ? | ? |
| Brandenburg | ? | ? |
| Bremen | ? | ? |
| Hamburg | ? | ? |
| Hesse | 7.0% | ? |
| Mecklenburg-Western Pomerania | ? | ? |
| Lower Saxony | 9.9% | ? |
| North Rhine-Westphalia | 9.4% | ? |
| Rhineland-Palatinate | 9.4% | ? |
| Saarland | 12.9% | ? |
| Saxony | ? | ? |
| Saxony-Anhalt | ? | ? |
| Schleswig-Holstein | 11.8% | ? |
| Thuringia | ? | ? |
Private households
For private households , the entire presentation of all expenses resulting from loans is more suitable , i.e. including repayments and redemption surrogates such as the savings payments from endowment insurance , annuity insurance or building society contracts , which must be added to the repayment. Therefore, instead of the interest coverage ratio select banks in the credit assessment rather the debt service coverage ratio , the debt service coverage or debt service limit .
Effects
The interest coverage ratio can be part of bond terms or loan agreements within the scope of the covenants . In doing so, the debtor undertakes to his creditors not to exceed a certain contractually defined upper limit of the interest burden ratio. If the upper limit is exceeded, there is a breach of contract ( covenant breach ), which initially usually results in a remedy / grace period , which is intended to enable the borrower to subsequently meet the specified key figures. However, if this still does not succeed , a higher credit margin or even an extraordinary termination right of the creditor will be triggered.
See also
- Over-indebtedness (in private households)
- National debt
- Budget deficit
- Budget balance
- EU convergence criteria
literature
- Zoller, Edgar and Dinauer, Josef (2003). Real Estate Investment Banking: New forms of financing for real estate financing. ISBN 3409121986 , Gabler Verlag
Individual evidence
- ↑ KfW, Mittelstands- und Strukturpolitik , March 2007, p. 10 ff. ( Memento from February 5, 2011 in the Internet Archive )
- ↑ Relationship between investment activity and the financial position of companies in the euro area. (PDF) monthly report. European Central Bank, April 2008, pp. 68ff. , accessed April 12, 2016 .
- ↑ Relationship between investment activity and the financial position of companies in the euro area. (PDF) monthly report. European Central Bank, April 2008, p. 74 , accessed April 12, 2016 .
- ^ Norbert Kloten / Peter Bofinger / Karl-Heinz Ketterer, Newer Developments in Monetary Theory and Monetary Policy , 1996, p. 92
- ↑ Heinz-J. Bontrup , wages and profits. Economics and business basics , 2nd edition, 2008
- ↑ Robert F. Heller, Budgetary Principles for the Federal, State and Local Authorities , 2010, p. 128
- ↑ Urs Egger, Agricultural Strategies in Various Economic Systems , 1989, p. 124
- ↑ Pascal Gantenbein / Klaus Spremann, Zinsen, Anleihe, Kredite , 2014, p. 25
- ^ Budget crises in the state. (PDF) Expert opinion of the Scientific Advisory Board at the Federal Ministry of Finance. April 2005, p. 7 , accessed April 12, 2016 .
- ↑ Dieter Nohlen, Kleines Lexikon der Politik , CH Beck, Munich 2007, ISBN 3406510620 , p. 548
- ↑ Bavaria's finances - excellent! (PDF; 3.7 MB) Bavarian State Ministry of Finance, accessed on March 9, 2011 .
- ^ Draft law of the state government amending the Financial Equalization Act. (No longer available online.) Bavarian State Ministry of Finance, p. 14 , formerly in the original ; Retrieved March 9, 2011 . ( Page no longer available , search in web archives )