Hi, Can someone explain why: By adjusting DEBT upward, INTEREST will INCREASE. Thus Interest coverage ratio = (EBIT/Interest) will decrease. Thanks!
I assume you mean in regards to adding non balance sheet items such as leases? If you pay 6% on all of your debt, and have $1MM in debt outstanding, your interest expense is $60K. If your debt is adjusted up to $2MM, your interest expense is now $120K (assuming the rate stays at 6%). Because your denominator is now higher, your ratio will now be lower. Not sure if this helps, I may be missing the point of the question.