A company has to pay interest expenses if it has debts. The interest expense is placed on a company's balance sheet as a liability, and it is tagged as a financial cost.
One way to evaluate the impact of interest expenses is to calculate interest expense to the operating income indicator. Usually, companies operating in the sector where large capital expenditures are required tend to pay higher interest costs.
Now let's assume you want to invest in Energy Minerals Sector. There are two alternatives for this sector in S&P Big Caps: Chevron Corporation (CVX) and Conoco Philips (COP).
The first graph below shows Chevron Corporation Interest Expenses to Operating Income Ratio over 2012-2022. The last value of the indicator for CVX was over 20%.
The second graph is for Conoco Phillips's (COP) Interest Expenses to Operating Income Ratio for the same period. The latest realization of the indicator for COP was over 10 %.
The decision is easy to take now since, for the indicator of Interest Expenses to Operating Income, the lower, the better you would choose Conoco Philips over Chevron. The assumption is that you look at only the Interest Expenses to Operating Income ratio to decide.
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