We are improving the Interest Coverage ratio calculation, one of the five criteria that drive our Credit Ratings. Specifically, we are updating the calculation of Interest Expense, the denominator in our Interest Coverage ratio, to include:

  1. cash paid for interest from the Cash Flow Statement when interest expense is not disclosed on the income statement and
  2. implied operating lease interest.

These updates will allow us to provide interest coverage ratios when companies do not disclose interest expense on the income statement but do on the Cash Flow Statement. Additionally, to ensure our ratings account for all interest expense, we are including the implied operating lease interest in our calculation of Interest Expense. Operating Leases are already included in Total Debt calculations in our Credit Ratings, so including the implied interest from these leases in Interest Expense maintains consistency between debt and interest. 

We expect this update to affect our research as follows:

  • Interest Coverage Ratios for 392 more companies than when we relied only in income statement disclosure for interest expense
  • Overall Credit Rating changes:
    • improved one level for 11 companies.
    • worse by one level for 167 companies.

We expect these changes to be live in our Company Models beginning on 8/30/23.

This article was originally published on August 29, 2023.

Disclosure: David Trainer, Kyle Guske II, Hakan Salt, and Italo Mendonça receive no compensation to write about any specific stock, sector, style, or theme.

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