![]() When calculating a company’s income, there may be several subcategories of income that include or exclude items such as interest expense. On an income statement, non-operating expenses such as interest will appear after the calculation for operating income. Interest expense is a cost incurred from borrowing money from lenders. Operating expenses are related to the day-to-day operations of a business. Interest expense is not an operating expense. Is Interest Expense an Operating Expense? That would be indicative of a major issue with its ability to pay its interest expense on its debt obligations. If, on the other hand, ABC Company had only $20,000 in operating income, its interest coverage ratio would be 2.5. This is a good indicator that the company will have no problems covering its interest expense obligations with its operating income. If its operating income is $160,000, it has an interest coverage ratio of 20. See this article to learn more about the interest coverage ratio.įor example, ABC Company has $8,000 in annual interest expense. Interest Coverage Ratio Formula = Operating Income / Interest ExpenseĪn interest coverage ratio of less than 3 is a negative sign, as it indicates that a company may have a hard time paying its interest expense with the current operating income. The interest coverage ratio is a measure of a company’s ability to meet its interest expense obligations with its operating income. ![]() With $254 million in interest income for 2023, the net interest expense is $1.874 billion. Walmart also breaks down its interest expense into debt interest expense and finance lease interest expense– which amount to $1.787 billion and $341 million in the fiscal year 2023. In Walmart’s income statement, the company nets its interest income– interest it has earned from investors– against its interest expense– amounts it has paid to lenders. This consolidated income statement was included in Walmart’s Annual Report, Form 10-K, for the year ended January 31, 2023. Real Company Example: Walmart's Interest Expense If ABC Company draws $50,000 on January 1 and $75,000 on July 1, its annual interest expense can be calculated as follows:Īnnual interest expense = ($50,000 + $125,000 / 2) x 0.10 = $8,750 This impacts the average debt balance because the debt balance varies throughout the year. The month of February is also shorter, so the time period would be 28 / 365.Īssume, instead, that ABC Company has a two-year interest-only line of credit at a fixed interest rate of 10% that it draws on only when necessary. In February, the interest expense would be slightly lower because the principal on the loan was paid down at the end of January, and the average debt balance was, therefore, lower for the month of February. ![]() In this case, the monthly interest expense for January would be: Its fiscal year begins January 1 and runs through December 31 in a year that is not a leap year. If ABC did not pay down its loan throughout the year and makes one payment at the end of the year, its annual interest expense will be $800,000.Īnnual interest expense = $10 million x 0.08 x (365 / 365) = $800,000Īssume instead that ABC makes payments monthly. Time Period = Number of days in a given time period / number of days in a yearĪssume ABC Company has a $10 million loan at a fixed interest rate of 8%.Interest Rate = Annualized Interest Rate . Average Debt Balance = (Beginning Debt Balance + Ending Debt Balance) / 2 .The formula for interest expense is: Interest Expense = Average Debt Balance x Interest Rate x Time Period What is the Formula for Interest Expense? ![]() Typically, the following items carry an interest obligation: Interest expenses can be applied to any type of borrowing. Interest expense appears on the income statement after operating income, as it is a non-operating expense. The interest payment is added to the principal to arrive at the total amount due to the lender. Principal is the amount of money borrowed, while interest is the cost of borrowing that money. The two main parts of a loan are principal and interest. This payment is known as interest expense. When a lender provides funds to a company, it expects to receive a payment in exchange. Interest expense is the cost of borrowing money from a lender.
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