Interest Expense
Candlefocus EditorInterest expense is an account listed on a company's income statement, which describes the cost of borrowing money. For businesses and individuals, borrowing money typically comes with associated costs, such as interest payments. Interest expense, as the name implies, is the cost that a business or individual incurs by taking out a loan.
Interest expense is typically incurred as a result of short and long-term borrowing. For example, a business may choose to borrow money to purchase inventory and supplies or a piece of equipment. Consumers, on the other hand, may take out a loan to purchase a vehicle or another item.
Interest expenses are treated as operating expenses on a company’s income statement and often have favorable tax treatment. As a result, it's important for companies to pay close attention to their interest expense, as higher costs lead to lower profits. The amount of interest paid will depend on a number of factors, including the amount borrowed and the interest rate.
Financial analysts often examine coverage ratios, such as interest coverage or cash interest coverage, to calculate and evaluate a company’s interest expense. These coverable ratios are used to assess the ability of a business to pay the interest on its debt. For example, if a company has an interest expense of $2 million and generates $3 million in interest income, its interest coverage ratio would be 1.5, which indicates that the company is capable of paying its interest expense.
When it comes to interest expenses, it’s important for companies to assess their financial health in order to determine the amount of debt it can responsibly bear. By measuring the cost of interest paid on various forms of borrowing, companies are better able to analyze the effects of borrowing money and determine if the cost of the loan is worth the cost of repayment.
Overall, interest expense is an important account listed on a company’s income statement that can have a significant impact on its profitability. By assessing interest expenses and understanding the cost of borrowing money, companies are better equipped to make informed decisions that can fuel their long-term success.