So the book says that because the interest coverage ratio (EBIT/Interest) is a pure income ratio, it does not change after translation. Then, I was just thinking that because EBIT is made up mostly of revenue and COGS, EBIT is translated with average exchange rate. However, interest (the denominator) on the other hand, is an expense usually from long term debt, which is a monetary asset translated using current rate. So shouldn’t this mean that interest rate would also be under current rate and thereby obscuring the EBIT/Interest ratio? I’m confused
any expense on the income statement (other than COGS and Depreciation - which are the only two items on the IS that have different rules between Temporal and Current Rate) is always translated at the average rate. This is because the expense is kind of accumulated throughout the year and would have been paid at different times at different rates - if at each point in time the company was reconciling the statement with its parent.
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