capitalized asset-interest coverage

[h21]

why interest coverage for capitalized asset is lower

 

[Flashback]

because EBIT is faced against lower interest expense

 

[h21]

Flashback wrote:
because EBIT is faced against lower interest expense

sorry you mean higher interest expense for capitalized asset, you pay interest rate * asset value

 

[bfry]

Flashback wrote:
because EBIT is faced against lower higher interest expense

I think thats what you meant. EBIT/Interest - adding capitlized interest to this ratio will cause interest to be higher thus making the coverage ratio lower.

 

[Flashback]

Sorry, I see that you said lower instead of higher. Could you post an example?

 

[fr_clem]

It could be higher or lower since you need to make two adjustments, one for EBIT, one for interests:
Adjusted interest coverage ratio = (EBIT + Capitalized interest included in depreciation expense) / (Interests + Capitalized interests during the year)

 

[Flashback]

Capitalized interest are not in denominator.

 

[fr_clem]

Well, if you start from interests (as per the income statement), they do not include capitalized interests. To reflect the actual amount of interests paid, you need to add the capitalized interests.

 

[Flashback]

You are talking about adjustment for analytical purpose.
Capitalization of interest mostly should cause higher (more favorable) an interest coverage ratio. This is reason why adjustement should be necessary.
I don’t know what h21 meant by lower interest cvrg upon capitalization.