Financial statement analysis when interest received exceeds interest expense

I am conducting financial statement analysis on Apple and I noticed that the company has interest received that exceeds interest expense. In Apple's 2016 10-K form page 27 shows "Other Income/(Expense), Net" where Interest and Dividend Income of 3,999 exceeds the Interest Expense of 1,456 for the year 2016. When I look at the consolidated income statement on page 39, I find that these two figures are aggregated under "Other income/(expense), net".

I have previously only analysed companies that have an interest expense, which is included as a separate line item on the Income Statement, and I use this item in the calculation of ratios such as Interest Coverage Ratio.

My question is, should I separate the interest expense from interest received, and use the interest expense figure to calculate the Interest Coverage Ratio? Or should I not calculate this ratio in this case? I found an example online for Colgate where this ratio is not computed when interest expense was negative (see the Excel table in the link).

Also, does having a net interest received mean that the company has a negative cost of debt?

• If I remember correctly Apple issues bonds to finance the dividend payments because that's currently less costly than repatriating cash to the US to pay dividends. I don't think the interest coverage ratio says anything interesting about Apple other than the Mt. Everest sized pile of cash earns more interest than the company spends financing it's dividend payments. However, it may be worth considering the costs of repatriating the cash when considering the size of the company's cash position.
– quid
Mar 20, 2017 at 16:12

1 Answer

My question is, should I separate the interest expense from interest received, and use the interest expense figure to calculate the Interest Coverage Ratio?

Yes - the Interest Coverage Ratio is how many times over it could pay its interest obligations with current earnings, so interest earned should not be considered.

Also, does having a net interest received mean that the company has a negative cost of debt?

No - if Apple were to take on more debt, that debt would have a positive "cost". The only reason its interest income/expense total is negative is because it's hoarding piles of cash in foreign countries where it's earning more interest than it pays on its debt. The tax cost to repatriate the cash to the US is more that its marginal cost of debt, so it's cheaper to borrow more money than to use its foreign cash.