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The interest expense is accounted for in the income statement. This is done on an accrual basis, so there may actually be interest on the income statement that has not actually been paid from cash flow to date as one reason. Secondly, the debts obtained from a credit bureau shows full principle and interest payments being serviced. If the interest expense found on the income statement is not added back, then the lender would be double counting the interest being paid on the loans (once from the income statement and once from the credit bureau). This double counting of interest payments could keep a deal that should be approved from cash flowing, thus causing the lender to decline the deal. Also, you will want to add back depreciation and carry forward expenses as well as those are not actual decreases in cash flow for the current year. I hope this helps. I'm a business banker for a major bank.

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โˆ™ 2012-03-21 02:30:34
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Q: Why add back interest expense to calculate debt service ratio?
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Spread Ratio: Interest Earned / Interest Expense


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How calculate expense-to-sales ratio?

sales to expense ratio should be under 10% of your net sales, on a monthly basis


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Times Interest Earned = Operating Income/ Interest Expense.


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A company's fixed interest expense is 8000 its income before interest expense and income taxes is 32000 Its net income is 9600 The company's times interest earned ratio is?

Formula for times interest earned = earning before interest and tax / interest expense Times interest earned = 32000 / 8000 = 4 times


How do you calculate debt to service ratio?

Debt Service Ratio and Debt Coverage Ratio mean the same thing. To calculate, * Add back any interest expense to get 'Cashflow Available to Pay Debt'. * Divide Cashflow Available to Pay Debt' by the debt payments for the period. * An answer of 1.0 or better means there is just enough cashflow to cover the debt. * Most lenders want to see 1.2 to 1.3 for a business Example: Net Income for the year $5,000 after a deduction of $10,000 interest expense. Debt payments of $1,200 per month. ($1,200 x 12 =$14,400 per year) Cashflow Available to pay Debt $5,000 plus $10,000 equals $15,000. Debt Service Ratio: $15,000/$14,400 1.04 Probably not enough to keep the commercial lenders happy.


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What are the Efficiency ratios formulas for banks?

divide the overhead expense by net interest income plus non interest income. A healthy bank should have an efficiency ratio of under 60%


What is the difference between gross expense ratio and net expense ratio?

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how do we calculate credit loss ratio in banks financials


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No. It can be but need not be. For example, you might calculate the ratio of today's temperature in Celsius and in Fahrenheit and calculate the ratio. That is not a rate.