Definition: The percentage of the operating profit absorbed by interest payments on borrowings
Significance:
This shows the impact of gearing on the P&L. If the percentage is high, a small reduction in operating profits, or a rise in the cost of borrowing, can wipe out pre-tax profits.
Calculation:
Find the net interest figure, multiply it by a hundred, and divide the result by the operating profit.
Example
In M&S's case, the net interest figure is actually positive, because the company received more in interest than it paid out. On that basis there is no sum to do. But it is often worth calculating the ratio only on interest payments and excluding receipts.
In M&S's case, receipts were £66m and operating profit was £897m, so the calculation would be:
(66 x 100) / 897 = 7.36%
If you look at the footnote to the P&L you can see that £37m of the £66m related to M&S's financial business. If you want to know the interest cover on the rest of its business, you might want to take the £29m interest payment instead:
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