metrics explained

Debt-to-Equity Ratio vs Interest Coverage Ratio: What's the Difference?

When it comes to financial ratios, there are many to choose from. But two of the most commonly used ratios when it comes to assessing a company's financial health are the debt-to-equity ratio and the interest coverage ratio. So, what's the difference between these two ratios?

What is the debt-to-equity ratio?

The debt-to-equity ratio is a financial ratio that measures the percentage of a company's capital that comes from debt. To calculate the debt-to-equity ratio, you simply divide a company's total liabilities by its total shareholder equity. A higher debt-to-equity ratio means that a company is more leveraged, and a lower ratio means that a company is less leveraged.

What is the interest coverage ratio?

The interest coverage ratio is a financial ratio that measures a company's ability to pay its interest expenses. To calculate the interest coverage ratio, you divide a company's earnings before interest and taxes (EBIT) by its interest expenses. A higher interest coverage ratio means that a company is more able to cover its interest expenses, and a lower ratio means that a company is less able to cover its interest expenses.

So, what's the difference between the two ratios?

The main difference between the debt-to-equity ratio and the interest coverage ratio is what they measure. The debt-to-equity ratio measures the percentage of a company's capital that comes from debt, while the interest coverage ratio measures a company's ability to pay its interest expenses. Both ratios are important in assessing a company's financial health, but they provide different information.

How to use the debt-to-equity ratio and the interest coverage ratio

Both the debt-to-equity ratio and the interest coverage ratio can be useful in assessing a company's financial health. The debt-to-equity ratio can be used to assess a company's leverage, and the interest coverage ratio can be used to assess a company's ability to pay its interest expenses. However, neither ratio should be used in isolation. Instead, both ratios should be considered together, along with other financial ratios and information, to get a complete picture of a company's financial health.

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