Intelligent investor chapter 6 by Graham indicates that interest coverage for a well run and safe railroad company should be at least 5x based on earnings before tax. We can take reference and extend the same argument to other defensive companies which generate stable cash flows and are not cyclical in nature. For example, REITs utilities supermarket transportation etc.
Companies that does not meet such criteria shall look deeper into their balance sheet and cash flow status history and confirm is it a once off or sustained situation into the future. If that is the case, there is great solvency and liquidity risk in terms of servicing the debts.
We should stay clear from such companies no matter how attractive the valuation is.
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