What is the formula for interest cover?

The formula for interest cover is defined as the ratio of profit before interest and taxes (also known as operating profit) to interest payable. This metric is crucial for assessing a company's ability to meet its interest obligations from its earnings. A higher interest cover ratio indicates a greater ability to pay interest expenses, suggesting lower financial risk for the company.

In this context, when a company's profit before interest is significantly higher than its interest expenses, it shows that the firm is generating sufficient earnings to comfortably cover its debt interest payments. This is essential for investors and creditors, as it indicates financial stability and the likelihood of continued operations without solvency issues.

The other options do not represent the interest cover ratio. For example, equity divided by net debt relates to leverage and capital structure, while debt divided by operating profit focuses on the relationship between total debt and earnings instead of explicitly addressing interest payments. Current liabilities divided by current assets pertains to liquidity and does not reflect profitability in terms of meeting interest obligations. Therefore, the formula of profit before interest divided by interest payable truly encapsulates the essence of the interest cover ratio.