why interest coverage for capitalized asset is lower
because EBIT is faced against lower interest expense
sorry you mean higher interest expense for capitalized asset, you pay interest rate * asset value
I think thats what you meant. EBIT/Interest - adding capitlized interest to this ratio will cause interest to be higher thus making the coverage ratio lower.
Sorry, I see that you said lower instead of higher. Could you post an example?
It could be higher or lower since you need to make two adjustments, one for EBIT, one for interests:
Adjusted interest coverage ratio = (EBIT + Capitalized interest included in depreciation expense ) / (Interests + Capitalized interests during the year )
Capitalized interest are not in denominator.
Well, if you start from interests (as per the income statement), they do not include capitalized interests. To reflect the actual amount of interests paid, you need to add the capitalized interests.
You are talking about adjustment for analytical purpose.
Capitalization of interest mostly should cause higher (more favorable) an interest coverage ratio. This is reason why adjustement should be necessary.
I don’t know what h21 meant by lower interest cvrg upon capitalization.