Aswath Damodaran 323
Interest Coverage Ratios and Bond Ratings: Large market
cap, manufacturing firms
Interest Coverage Ratio Rating
> 8. 5 AAA
6. 50 - 6. 50 AA
5. 50 – 6. 50 A+
4. 25 – 5. 50 A
3. 00 – 4. 25 A-
2. 50 – 3. 00 BBB
2. 05 - 2. 50 BB+
1. 90 – 2. 00 BB
1. 75 – 1. 90 B+
1. 50 - 1. 75 B
1. 25 – 1. 50 B-
0. 80 – 1. 25 CCC
0. 65 – 0. 80 CC
0. 20 – 0. 65 C
< 0. 20 D
For more detailed interest coverage ratios and bond ratings, try the ratings.xls spreadsheet on my web site.
These are interest coverage ratio/ratings classes for large manufacturing firms
(Market cap > $ 5 billion)
The ratios need to be much higher for smaller firms to get similar ratings. (See
ratings.xls spreadsheet)
Special cases:
1. If you have no interest expenses, your interest coverage ratio will be infinite:
AAA rating (does not matter anyway, since you probably have no debt)
2. 2. If you have negative operating income, interest coverage ratio is negative:
D rating. You may want to modify by using average operating income over
last few years.
