Why does the interest coverage ratio add interest back into CFO in the numerator? Isn’t it already included in the CFO number? Interest covereage = (CFO + interest paid + tax)/Interest
CFO exclude net of tax interest expense, thats why you have to add it, i think you are confused between EBIT and CFO. Interest expense in Income statement is a cash outflow so it is out of CFO and should be added net of tax to calculate the ratio
Interest paid would be an outflow from CFO. You need to add it back to find the true interest coverage; otherwise your result will be 1x’s less than it should be.
EBIT/int expense = coverage ratio.