Interest Expense to Debt Ratio in Excel

Interest expense to debt ratio is a financial ratio that measures how much interest a company pays on its total debt. It is calculated by dividing the total interest expense by the total short-term and long-term debt. This ratio indicates how well a company can manage its debt obligations and how much of its income is used to pay interest.

A lower interest expense to debt ratio means that a company has a lower debt burden and pays less interest on its debt. A higher interest expense to debt ratio means that a company has a higher debt burden and pays more interest on its debt. A high ratio may indicate that a company is overleveraged and may face difficulties in meeting its debt payments.

Formula

The formula to calculate interest expense to debt ratio in Excel is:

=Interest_Expense/Total_Debt

Where:

• Interest_Expense is the total amount of interest paid on all debt in a given period, such as a year or a quarter.
• Total_Debt is the sum of all short-term and long-term debt outstanding at the end of the period.

Example

Let’s assume that ABC Ltd. has the following financial data for the year 2023:

• Interest expense: $10 million
• Short-term debt: $50 million
• Long-term debt: $100 million

To calculate the interest expense to debt ratio for ABC Ltd., we can use the following formula in Excel:

=10/(50+100)

The result is 0.067, which means that ABC Ltd. pays 6.7% of its total debt as interest.

Interpretation

The interest expense to debt ratio can be used to compare the debt performance of different companies or industries. Generally, a lower ratio is preferred, as it indicates that a company has a lower cost of debt and a higher profitability. However, the ratio may vary depending on the type and maturity of debt, the interest rate environment, and the industry norms.

For example, a company that has a long-term fixed-rate debt may have a lower interest expense to debt ratio than a company that has a short-term variable-rate debt, even if they have the same amount of debt. This is because the former company is less exposed to interest rate fluctuations and can lock in a lower interest rate for a longer period.

Similarly, a company that operates in a capital-intensive industry, such as utilities or manufacturing, may have a higher interest expense to debt ratio than a company that operates in a less capital-intensive industry, such as services or technology. This is because the former company may need to borrow more to finance its assets and operations.

Therefore, the interest expense to debt ratio should be used with caution and in conjunction with other financial ratios, such as debt-to-equity ratio, debt-to-asset ratio, and debt service coverage ratio, to get a more comprehensive picture of a company’s debt situation.

Alternative Approaches

There are some alternative approaches to calculate the interest expense to debt ratio in Excel, such as:

• Using the SUM function to add up the short-term and long-term debt, instead of using the + operator. For example:

=10/SUM(50,100)

• Using the AVERAGEIF function to calculate the average interest rate on the total debt, and then multiplying it by the total debt. For example, if the interest rates on the short-term and long-term debt are 8% and 10%, respectively, we can use the following formula:

=AVERAGEIF({50,100},{8%,10%})*SUM(50,100)

• Using the XIRR function to calculate the internal rate of return (IRR) of the cash flows related to the debt, and then multiplying it by the total debt. For example, if the short-term and long-term debt are due in one year and five years, respectively, and the interest payments are made annually, we can use the following formula:

=XIRR({-150,10,10,10,10,110},{0,1,2,3,4,5})*150

Note that the cash flows and the dates must be entered as arrays, and the initial debt amount must be entered as a negative value.