Interest Coverage Ratio



Please read the disclaimer at the bottom of my blog if you wish to continue with the contents below.
Interest coverage is a useful ratio to determine the ability of a company to pay off its remaining debt. The lower the number, the more inadequate it becomes.

To calculate interest coverage, use a company's full year earnings before tax, add back its financial cost and divide by its interest expenses. The formula is as shown below:
It is ideal to judge both dividend yield and interest coverage of a stock to give a more balance view of its overall health. High dividend yield should not be the only criteria you use when sourcing for a reit. If it is unable to meet its interest obligation, it can be dangerous to you, the investor. If the interest coverage ratio of a company(as compared to its peers) is relatively low, it is showing signs of burden to its debt expenses.

Below is a table showing the top 10 highest dividend yielding reits and their interest coverage ratio:
As shown above, similar yielding stocks can have drastically different interest coverage ratios. By comparing the interest coverage ratio and dividend yield percentage of reits side by side like that, you should be able to get a better picture of what you are buying into. Hope you find this useful.

10 comments :

  1. Hayden,

    Thanks for sharing the Reits table, which came in handy for me as I am curently looking into REITS counter, especally Lippo Malls, which looks promising from these 2 indicators.

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    Replies
    1. Hi Richard,
      Np, Merry Christmas to you!

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  2. Hi, just want to know your thoughts. Though lippo seems to have one of the highest dividend yield, it's interest coverage is one of the lowest. This means it shows signs of higher burden to it's debt relative to its peers. So does lippo mall really look that favorable? I suppose it's s case of higher risk higher dividend returns here?

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    Replies
    1. Hi Justin,
      For a reit that has 100% of its portfolio in Indonesia, one has to know that currency risk is involve too. The rupiah hit a 16-year low of 12,930 on last Tuesday according to Reuters data. Analysts said the rupiah fell due to corporate demand for dollars and worries that overseas investors were pulling money out of Indonesian assets, with its moves exacerbated by thin year-end trading conditions.
      Also we usually see a better price to book discount for foreign based asset. Fortune reit, lippomall are two examples.
      One good point to note Lippomall has substantial amount of cash and short term investment(223mil for the latest quarter) and so its net debt to equity is only at 0.37x.
      Recent price dilution was because of a private placement they did to acquire another mall in indo. They will be giving another round of dividend earlier for the exisitng shareholders. Not vested.

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  3. Hi Hayden,

    Just curious, what application are you using for all these tables?

    Regards,
    JY

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    Replies
    1. Hi JY,
      I use Shareinvestor, but I try my best to counter check all the data given with the companies' income statements released by sgx.

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  4. Hi Hayden,
    Thanks for the reply. Shareinvestor need pay money wor... Any "free" alternatives?

    JY

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    Replies
    1. Hi JY,
      The information is available to the public via SGX website. You can check each individual income statements released via SGX every quarter and get the data from there manually.

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    2. Thanks a lot:)
      Happy Holidays!

      JY

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