Interest Expense

Interest expense sits below operating profit for many nonfinancial companies

A simplified income statement is:

Operating income − interest expense ± other non-operating items = income before taxes − income taxes = net income

That is why two companies with identical operating businesses can report very different bottom lines when leverage differs.

Basic example

Assume:

• operating income: $250 million
• interest expense: $60 million
• other non-operating items: $10 million gain

Pretax income:

$200 million

The $60 million financing cost reduced the amount available before taxes even though it did not change revenue or gross profit.

Interest expense follows both debt amount and borrowing cost

A simplified approximation is:

Average debt × average interest rate

If average debt is:

$2 billion

at an average rate of:

5%

annual interest is roughly:

$100 million

before considering fees, amortization, timing and other adjustments.

A company can therefore reduce interest expense by:

• repaying debt
• refinancing at a lower rate
• shifting from floating to cheaper fixed funding
• allowing high-cost debt to mature

The reverse can raise expense.

Real 2026 example

ACCESS Newswire reported interest expense of approximately:

• $43,000 for the three months ended June 30, 2026
• $85,000 for the six-month period

and attributed the year-over-year decline to debt reduction after a business sale.^[2]

That is a clean example of interest expense falling because principal fell.

Fixed-rate debt

Fixed-rate borrowing generally locks the contractual rate until maturity or another specified event.

If market rates rise:

current interest expense on that debt does not immediately reprice.

The company can still face higher expense later when it refinances.

Floating-rate debt

Floating-rate borrowing can reprice with a benchmark.

If a company has:

$1.5 billion

of floating-rate debt and its effective rate rises by 2 percentage points:

approximate annual interest cost can rise by:

$30 million

before hedging or other effects.

Operating profit can remain unchanged while net income declines.

Gross vs. net interest

Some companies present:

• gross interest expense
• interest income
• net interest expense

If gross expense is:

$100 million

and interest income is:

$25 million

net interest expense is:

$75 million

The distinction matters in interest-coverage calculations.

ROIStreet’s GLS-059 — Interest Coverage Ratio explains why using gross versus net interest can materially change the multiple.

Interest expense vs. cash interest

Reported interest expense can include noncash components such as:

• amortization of debt issuance costs
• accretion of discounts
• amortization of premiums

Cash paid during the period can differ.

For credit analysis, both figures can matter.

The income statement shows accounting cost.

The cash-flow statement helps show cash burden.

Capitalized interest

Interest incurred while constructing certain qualifying assets can be capitalized into asset cost rather than recognized immediately as interest expense.

That can make income-statement interest look lower than total financing cost incurred during a major construction period.

Capital-intensive companies deserve extra scrutiny here.

Interest expense and EBITDA

EBITDA adds interest back to net income.

That makes EBITDA useful for comparing operations before financing structure.

It also means EBITDA ignores the actual financing burden.

Two companies with the same EBITDA can have very different cash available to shareholders if one carries far more debt.

Interest expense and coverage

A common EBIT interest-coverage formula is:

EBIT ÷ interest expense

If EBIT is:

$300 million

and interest expense is:

$75 million

coverage is:

4.0x

The ratio measures earnings cushion around the financing cost.

It does not show principal maturity or liquidity.

Banks are different

For banks and many financial institutions:

interest expense is part of ordinary operating economics because deposits and borrowings fund earning assets.

Treating bank interest expense as purely non-operating can distort analysis.

The business model determines classification relevance.

Common mistakes

"Interest expense equals debt principal."

No. It is the cost of financing, not the amount borrowed.

"Fixed-rate debt has no interest-rate risk."

Refinancing still matters.

"Interest expense equals cash interest paid."

Not always.

"EBITDA proves interest is unimportant."

No. EBITDA deliberately removes financing cost.

Trace interest expense to gross debt, average rates, fixed-versus-floating exposure, hedges, maturity schedule and capitalized interest. Falling expense is strongest when it reflects durable deleveraging or cheaper financing rather than a temporary accounting adjustment.