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Interest expense is the cost of borrowing money. Interest is typically charged for any type of debt, be it a bank loan, bond, line of credit or an outstanding balance on a credit card. The amount charged is equal to the interest rate times the outstanding balance. So if the loan balance is $1,000, and the interest rate is 8%, the interest expense is $80. On an income statement, interest expense is shown as a non-operating expense.

For a United States business, interest expense is always deductible for tax purposes. For U.S. individual taxpayers, however, only certain types of interest expenses are deductible, most commonly, interest paid on a home mortgage.

The amount of interest expense a company pays has a direct impact on the company’s profitability. Unlike other expenses that vary with revenue levels, interest expense is a fixed amount that must be paid even if sales decline. This is important to investors because interest expenses will be paid before any profits are distributed to owners.

Investors can analyze a company’s debt risk by calculating its debt-to-equity ratio and interest coverage ratio. If these ratios are “healthy” for that particular type of company, then there is a good chance that the company will be able to pay its interest expense and still have profits left over to distribute to owners.  

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