Question: Ratio analysis with negative denominator
I have a quick question: If I am trying to compute the ratio for interest expense to operating income, what should I do if the operating income is negative.
For example: Interest exp= 211 operating income= -197
211/-197= -107%
Intuitively, the result is not reflective of the actual situation. You lost money, and then had to pay interest, so the percentage should be huge.
Thanks for the help!
Either you find a way to get to normalized operating income (remove one-time, extraordinary items or use some forward projection of operating income--in any case try to be consistent in methodology) or you should treat as NM, not meaningful.
Do you mean Operating Inc / Interest? --- That is called an interest coverage ratio, I don't I've never seen it the other way..
Anyway, if it looks like completely non-meaningful data (because of the large operating loss), it probably is non-meaningful.
It's not going to be comparable to anything positive, so yeah N/M is probably your best bet.
Maybe do interest exp as a percent of revenue if you want something to compare..
Well you just found out that the company can't cover interest expense from operating income. So using this ratio is pointless.
unless the op income is negative from large non cash write off like impairment to goodwill, inventory, etc, restructure fees
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