Interest Coverage Ratio Calculator
Calculate the interest coverage ratio to assess a company's ability to pay its interest expenses. This ratio measures how many times a company can cover its interest payments with its earnings.
Financial Information
Ratio Results
Interest Coverage Ratio:
0.00x
EBIT:
$0
Interest Expense:
$0
Risk Assessment
Coverage Quality:
N/A
Default Risk:
N/A
Credit Rating Impact:
N/A
Financial Health
Debt Service Capacity:
N/A
Interest Burden:
0.00%
Financial Flexibility:
N/A
Understanding Interest Coverage Ratio
The interest coverage ratio measures a company's ability to pay its interest expenses on outstanding debt. It shows how many times the company's earnings can cover its interest payments, providing insight into financial stability and debt servicing capacity.
Interest Coverage Ratio Formula
Basic Formula
- Interest Coverage Ratio = EBIT / Interest Expense
- EBIT = Earnings Before Interest and Taxes
- Shows times interest can be paid
- Higher ratio indicates better coverage
Example Calculation
- EBIT: $500,000
- Interest Expense: $75,000
- Ratio: $500,000 / $75,000 = 6.67x
- Interest covered 6.67 times
Ratio Interpretation
Coverage Levels and Risk Assessment
Understanding different coverage ratios
Strong Coverage (8x+)
- Excellent debt service ability
- Very low default risk
- Strong credit quality
- Attractive to lenders
Good Coverage (4x-8x)
- Strong debt service ability
- Low default risk
- Good credit quality
- Favorable borrowing terms
Adequate Coverage (2.5x-4x)
- Moderate debt service ability
- Moderate default risk
- Fair credit quality
- Standard borrowing terms
Weak Coverage (1.5x-2.5x)
- Marginal debt service ability
- High default risk
- Poor credit quality
- Restrictive covenants
Insufficient Coverage (<1.5x)
- Unable to service interest
- Very high default risk
- Very poor credit quality
- Potential bankruptcy
Industry Benchmarks
| Industry | Typical Range | Key Factors |
|---|---|---|
| Utilities | 3x-6x | Stable cash flows, regulated returns, capital intensive |
| Technology | 10x-20x | High margins, low debt, growth focus |
| Manufacturing | 4x-8x | Cyclical revenues, equipment financing |
| Real Estate | 2x-4x | Property leverage, interest rate sensitivity |
Components of the Ratio
EBIT (Earnings Before Interest and Taxes)
- Operating profit measure
- Before interest and tax expenses
- Shows operating profitability
- Available for debt service
Interest Expense
- Cost of borrowing
- Includes all interest payments
- Both short-term and long-term debt
- Fixed contractual obligation
Applications in Credit Analysis
Lending Decisions
- Creditworthiness assessment
- Loan approval criteria
- Interest rate determination
- Covenant setting
Bond Ratings
- Credit rating agency input
- Rating category determination
- Default risk assessment
- Investment grade thresholds
Limitations and Considerations
Accounting Issues
- EBIT calculation variations
- Non-operating income exclusion
- One-time charges impact
- Depreciation differences
Economic Factors
- Cyclical earnings volatility
- Interest rate changes
- Refinancing risk
- Economic downturn impact
Related Coverage Ratios
Debt Service Coverage Ratio (DSCR)
- NOI / Annual Debt Service
- Includes principal payments
- Real estate focus
- Comprehensive coverage
Fixed Charge Coverage
- (EBIT + Lease Payments) / (Interest + Lease Payments)
- Includes lease obligations
- Broader fixed charges
- More conservative measure
Improving Interest Coverage
Increase EBIT
- Revenue growth strategies
- Cost reduction programs
- Margin improvement
- Efficiency gains
Reduce Interest Expense
- Debt refinancing
- Interest rate swaps
- Debt reduction
- Optimal capital structure
Key Takeaways for Interest Coverage Ratio Calculator
- Interest Coverage Ratio = EBIT / Interest Expense measures ability to pay interest on debt
- A ratio of 2.5x or higher is generally considered adequate for most industries
- Higher ratios indicate lower default risk and stronger credit quality
- The ratio is used by lenders and rating agencies to assess creditworthiness
- Interest coverage varies significantly by industry due to different business models
- The calculator helps evaluate debt capacity and financial risk
- EBIT should be normalized to exclude one-time items for accurate assessment
- Use the calculator to compare interest coverage across companies and assess borrowing capacity