Capitalized interest

Capitalized interest is interest on borrowed money that a company adds to the cost of an asset it is building, instead of recording it as interest expense on the income statement. It applies to large, long projects such as factories, data centers, real estate developments or power plants, where the borrowing is tied to construction that takes months or years.

The interest is still paid in cash. It simply moves from the income statement to the balance sheet, where it becomes part of the asset's value and is later spread over the asset's useful life through depreciation. In the years of heavy construction, this makes reported interest expense lower and net income higher than they would be if all interest were expensed straight away.

For investors, the useful habit is to check whether a company capitalizes a meaningful amount of interest, which it discloses in the notes to its financial statements and data sites often show as its own line. When it does, add the capitalized amount back to interest expense before calculating interest coverage, so the ratio reflects the full cost of the company's debt.