What Ashland’s Interest Coverage Ratio Indicates
Ashland’s interest expense
Ashland’s (ASH) interest expense has fluctuated. At the end of fiscal 3Q17, ASH’s interest expense was at $203 million, an increase of $78 million as compared to the same period last year. The increase was primarily due to accretion related to a tender offer of 2029 notes. However, the interest expense has reduced from $317 million in 2012 to $182 million in 2016 primarily due to the reduction in debt.
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Interest coverage ratio
An interest coverage ratio indicates how well a company can service its debt. It’s determined by dividing the company’s EBIT (earnings before interest and tax) by its interest expense. The higher the multiple, the better it is for the company since it can easily service its debt. At present, ASH’s interest coverage ratio stands at 0.50x, indicating that ASH will find it difficult to service the debt if the trend continues. However, since 2012, ASH’s interest coverage ratio has varied from 0.30x to 4.30x. ASH’s peers Westlake Chemical (WLK), Eastman Chemical (EMN), and Huntsman (HUN) have interest coverage ratios of 16.17x, 5.73x, and 4.63x, respectively.
In comparison to its peers, ASH’s interest coverage ratio is not consistent and not strong enough to service its debt comfortably. ASH needs to take steps to improve its EBIT so that its interest coverage ratio improves in order to service its debt comfortably.
Investors can hold Ashland indirectly by investing in the PowerShares Russell Midcap Pure Value Portfolio (PXMV), which has invested 1.3% of its portfolio in Ashland as of September 28, 2017.