You can find information about a company’s debt and the amount of interest it pays to service its debt, but the actual interest rate it pays is usually not included in its financial statements. And while many companies have different types of debt (long term, short term, etc.) with different interest rates, it is possible to calculate a company’s overall interest rate from the information. found in its income statement and balance sheet.
Calculating an interest rate
To calculate an interest rate, you will need some information:
- Interest charges, which you can find on a company’s income statement.
- The period covered by the income statement, usually a quarter or a full year.
- The main debt balance of the business, which can be found on its balance sheet. Make sure you add up current long-term, short-term, and long-term debt.
Once you have that information, the math is pretty straightforward. Simply divide the interest charge by the principal balance and multiply by 100 to convert it to a percentage. This will give you the periodic interest rate, or the interest rate for the period covered by the income statement.
If the information comes from the company’s annual income statement, you’re done. In this case, the periodic rate is the interest rate paid on the debt. On the other hand, if the income statement covered a shorter period, such as a quarterly or monthly income statement, multiply that result by the number of periods in a year. For example, if you are using a quarterly income statement, multiply the periodic interest rate by four.
To illustrate this point, let’s look at some data from Procter & Gamble‘s (NYSE: PG) first quarter 2016 financial statements. During the quarter, the company paid $ 146 million in interest expense and had $ 32.8 billion in debt on its balance sheet.
Using the formulas listed, we can determine the periodic interest rate at 0.45%. Since these data are taken from the quarterly financial statements, multiplying this result by four means that Procter & Gamble paid an overall interest rate of 1.9% on its debts during the first quarter.
If you’re reading this because you want to learn more about stocks and how to invest, check out The Motley Fool’s Broker Center and get started today.
This article is part of The Motley Fool Knowledge Center, which was created based on the wisdom gathered by a fantastic community of investors. We would love to hear your questions, thoughts and opinions on the Knowledge Center in general or on this page in particular. Your contribution will help us help the world invest, better! Email us at firstname.lastname@example.org. Thank you – and crazy!
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.