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GuruFocus has detected 2 Warning Signs with Discover Financial Services $DFS.
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Discover Financial Services (NYSE:DFS)
Interest Coverage
2.25 (As of Mar. 2017)

Interest Coverage is a ratio that determines how easily a company can pay interest expenses on outstanding debt. It is calculated by dividing a company’s Operating Income (EBIT) by its Interest Expense. Discover Financial Services's Operating Income for the three months ended in Mar. 2017 was $868 Mil. Discover Financial Services's Interest Expense for the three months ended in Mar. 2017 was $-386 Mil. Discover Financial Services's interest coverage for the quarter that ended in Mar. 2017 was 2.25. The higher the ratio, the stronger the company’s financial strength is.

DFS' s Interest Coverage Range Over the Past 10 Years
Min: 0.8   Max: 3.44
Current: 2.49

0.8
3.44
DFS's Interest Coverage is ranked lower than
66% of the 351 Companies
in the Global Credit Services industry.

( Industry Median: 6.94 vs. DFS: 2.49 )

Note: If both Interest Expense and Interest Income are empty, while Net Interest Income is negative, then use Net Interest Income as Interest Expense.


Definition

Interest Coverage is a ratio that determines how easily a company can pay interest expenses on outstanding debt. It is calculated by dividing a company’s Operating Income (EBIT) by its Interest Expense:

If Interest Expense is negative and Operating Income is positive, then

Interest Coverage=-1*Operating Income/Interest Expense

Else if Interest Expense is negative and Operating Income is negative, then

The company did not have earnings to cover the interest expense.

Else if Interest Expense is 0 and Long-Term Debt is 0, then

The company had no debt.


Note: If both Interest Expense and Interest Income are empty, while Net Interest Income is negative, then use Net Interest Income as Interest Expense.

Discover Financial Services's Interest Coverage for the fiscal year that ended in Dec. 2016 is calculated as

Here, for the fiscal year that ended in Dec. 2016, Discover Financial Services's Interest Expense was $-1,398 Mil. Its Operating Income was $3,656 Mil. And its Long-Term Debt was $25,443 Mil.

Interest Coverage=-1*Operating Income (A: Dec. 2016 )/Interest Expense (A: Dec. 2016 )
=-1*3656/-1398
=2.62

Discover Financial Services's Interest Coverage for the quarter that ended in Mar. 2017 is calculated as

Here, for the three months ended in Mar. 2017, Discover Financial Services's Interest Expense was $-386 Mil. Its Operating Income was $868 Mil. And its Long-Term Debt was $26,823 Mil.

Interest Coverage=-1*Operating Income (Q: Mar. 2017 )/Interest Expense (Q: Mar. 2017 )
=-1*868/-386
=2.25

* All numbers are in millions except for per share data and ratio. All numbers are in their local exchange's currency.

The higher the ratio, the stronger the company’s financial strength is.


Explanation

Ben Graham requires that a company has a minimum interest coverage of 5 with the companies he invested. If the interest coverage is less than 2, the company is burdened by debt. Any business slow or recession may drag the company into a situation where it cannot pay the interest on its debt.

Interest Coverage is an important factor when GuruFocus ranks a company’s overage financial strength.


Related Terms

Operating Income, Interest Expense, Financial Strength


Historical Data

* All numbers are in millions except for per share data and ratio. All numbers are in their local exchange's currency.

Discover Financial Services Annual Data

Nov07Nov08Nov09Nov10Nov11Nov12Dec13Dec14Dec15Dec16
interest_coverage 1.251.291.690.802.362.823.443.262.862.62

Discover Financial Services Quarterly Data

Dec14Mar15Jun15Sep15Dec15Mar16Jun16Sep16Dec16Mar17
interest_coverage 2.153.033.033.022.402.742.652.682.412.25
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