Interest Cover: What you need to know about leveraged cos

Given the high interest rate environment, investors will be keenly watching companies’ ability to meet their interest payments. This is one data point that investors should analyze while looking at the fundamentals of a company, and the interest coverage multiple does exactly this.

The interest coverage multiple or the interest coverage ratio is calculated by dividing a company's earnings before interest and taxes for a particular period by the company's interest expenses for the same period.

The higher the multiple is, the better the financial position of a company.

Interest coverage multiple less than one indicates the company is not generating sufficient revenues to meet its cost of debt. A ratio above 1.5 is considered to be good. However, a good or bad multiple depends on the industry the company operates in. For instance, infrastructure and realty companies have a lot of debt on their books. But debt in itself is not a bad thing, as long as the company is able to service it

Speaking to Moneycontrol.com, fundamental analyst at Kotak Securities, Dipen Shah, said “We do consider the interest coverage ratio to be an important parameter. A ratio of almost 1 or below 1 is not preferable.”

-Anisha Mappat, Riken Mehta

2 non-Tata stocks that may react to Mistry's appointment

Cyrus Mistry currently Managing Director of Shapoorji Pallonji Group is the name and face we all will be hearing and looking in the media for the next few days atleast. That’s because, he is all set to take over mantle of leadership from Ratan Tata as the Chairman of India's largest conglomerate, the Tata Group.

The Board of Directors of Tata Sons has appointed Cyrus Pallonji Mistry as Deputy Chairman. Mistry will work with Ratan Tata over the next one year and take over from him when Tata retires in December 2012.

Who is Cyrus Mistry?

Cyrus Mistry, has been a Director of Tata Sons since August 2006. He is a graduate of Civil Engineering from Imperial College, London, and has a Master of Science in Management from the London Business School.

How will stocks react to his appointment?

It’s a no brainer that Tata group stocks will react to the news of a new chairman. There are around 100 companies, listed or unlisted, of the Tata group.

Below we have attached the entire list of Tata Group companies. However, there are two stocks which may also react to Cyrus Mistry’s appointment. The two unheard names are Gokak Textiles and Forbes Gokak .

Why so?
As per latest BSE Shareholding data, Shapoorji Pallonji & Company Ltd holds 73.56% and 72.06% stake in Gokak Textiles and Forbes Gokak respectively. The stake is valued at Rs 23 crore and Rs 371 crore respectively.

Cyrus Mistry is the younger son of Shapoorji Pallonji Group. The group's business interest covers construction (including residential, commercial, industrial and infrastructure), real estate, infrastructure (comprising coal mining, power, ports and roads), biofuels and agriculture, consumer products, electro-mechanical and MEP services, facades and interiors, engineering, textiles, business automation and shipping and logistics.

With over 23,000 employees and a group turn over of USD 2.5 billion, it is a name quite familiar in the India Inc.

Gokak Mills is engaged in yarn spinners, dyed yarns, canvas, terry towels, knitted garments and other downstream products.

For the quarter ending September 2011, Forbes Gokak reported net profit of Rs 0.02 crore on turnover of Rs 66.37 crore. Gokak Textiles bottomline was deep in red. The company posted net loss of Rs 11.02 crore.

-Riken Mehta