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Interest Coverage Ratio Calculator

Find your interest coverage ratio.

Result

5.00

How it is calculated

The interest coverage ratio is ICR = EBIT / interest expense. EBIT is earnings before interest and taxes for a period, and interest expense is the interest due over the same period. Use the same currency and the same period for both. The result tells you how many times operating profit covers the interest bill; the higher it is, the more room before interest becomes a problem. Interest must be greater than zero, otherwise there is no result (a company with no interest has nothing to cover). EBIT may be negative, which gives a negative ratio. What counts as a safe level depends on the sector and on how stable profits are.

Worked example

A company earns an EBIT of 450,000 in a year and pays 90,000 in interest. ICR = 450,000 / 90,000 = 5.00. Operating profit covers the interest five times, so profit could fall by a large fraction before the interest bill could not be met.

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Common mistakes

  • Using net income instead of EBIT, which is already after interest and tax.
  • Mixing periods, such as annual EBIT with quarterly interest.
  • Leaving out capitalised interest or lease interest in the expense, which flatters the ratio.
  • Treating a single year as typical: a ratio from a peak year can hide thin cover in a weak year.
  • Using EBITDA instead of EBIT, which ignores depreciation and gives a higher ratio.

Sources

About this calculator

This calculator finds the interest coverage ratio (ICR) — EBIT (earnings before interest and taxes) divided by interest expense — which shows how many times over a company could pay its interest obligations from its operating earnings. A ratio below about 1.5 is often seen as a warning sign of financial distress.

Lenders and bond analysts use it to assess how safely a company can service its debt before extending credit, and business owners and finance students use it to check a company's debt capacity from its income statement.

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Comments (1)

  • Editorial team

    Treat one ratio as a snapshot and test it. Lower EBIT by 30 percent and run the tool again: if the coverage drops close to 1, a modest bad year could leave interest unpaid from operations. Make sure the EBIT you enter is before interest, not EBITDA, and that interest is the same period's expense, including any capitalised portion if you can see it. Which company or sector are you looking at, and what coverage would you consider comfortable there?

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