Interest and principal coverage ratios have variations. Coverage ratios and risk The coverage measure to emphasize depends on the amount of business and financial risk the company you are analyzing has. The higher the risk, the more you should stress operating cash flow measures. Use the maturity and priority variations when there is a significant amount of each type of debt in the company's capital structure. Making trend comparisons When you compare a company's ratios over a number of different periods, look for trends.
Trends are patterns in the values of a ratio.
Trends indicate the realities of a company's operating performance and financial condition far better than a single-period measure. You need to identify the direction of the trend and its variability. The ratio values can be increasing or decreasing, and the changes can be generally consistent from one period to the next or vary considerably in some periods. To identify a trend, you need at least three periods of data. To be confident about it, you need five or more, especially if it is highly variable.