If the Interest Expense is too high, it can disturb the working of a company or a house. High Interest Expense clearly indicate presence of huge debts and loans that the company needs to pay, which is the reason why lenders and creditors want to know about the monthly revenue generating capacity of the company before lending them money.
If a company fails to pay its Interest Expense, this results in default in paying. This is why lenders are interested in studying the interest coverage ratio of the company which acts as a margin of safety. The interest coverage ratio becomes of very importance because it is based on current expenses and earnings of the company, so it primarily reflects the ability of a company to pay short term obligations.
Some companies are seasonal in nature and they experience pretty low business and less cash inflow during seasonal lows. So these companies have to borrow money to get through that period. If we compare the seasonal company with a normal one, we will find that the seasonal or the cyclical company has higher Interest Expense than the normal one. Therefore, it is advised that comparison be made between companies within the same industry, and the definition of a “High” or “Low” ratio should be made within this context.
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