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Take a LookQuick Definition
Estimates the interest rate a company is paying on its debt.
[sc:kit02 ]Interest Expense to Total Debt Formula
Explanation of Interest Expense to Total Debt
The Interest Expense to Total Debt ratio measures the estimated interest rate the company is paying on its total debt. This ratio assumes both Short Term Debt and Long Term Debt are summed together, as the Interest Expense figure is usually shown on the income statement as a summation of short and long-term interest expenses.
Importance of Interest Expense to Total Debt
The Interest Expense to Total Debt ratio should not change very much from quarter to quarter, but you may see the ratio change from year to year. If this ratio rises quickly over a given time period, this may indicate the company is paying a higher than normal interest rate on this debt, and may point to credit problems within the company.
A decreasing Interest Expense to Total Debt ratio may indicate the company has either taken on more debt at a lower interest rate, or they have been able to renegotiate the terms of their debt. Acquisitions may also have a positive or negative affect on the overall interest rate, if the company takes over the acquired company’s debt.