Enter the Earnings Before Interest and Taxes (EBIT) and the Interest Expense into the calculator to determine the coverage ratio. This ratio helps assess a company’s ability to pay interest on its debt.

Coverage Ratio Formula

The following formula is used to calculate the coverage ratio:

CR = EBIT / IE

Variables:

• CR is the coverage ratio
• EBIT is the Earnings Before Interest and Taxes
• IE is the Interest Expense

To calculate the coverage ratio, divide the Earnings Before Interest and Taxes (EBIT) by the Interest Expense (IE).

What is a Coverage Ratio?

The coverage ratio is a financial metric used to measure a company’s ability to pay the interest on its debt. A higher coverage ratio indicates that a company is more capable of meeting its interest obligations from its operating earnings. It is a key indicator of financial stability and is closely monitored by creditors and investors.

How to Calculate Coverage Ratio?

The following steps outline how to calculate the Coverage Ratio.

1. First, determine the Earnings Before Interest and Taxes (EBIT).
2. Next, determine the Interest Expense (IE).
3. Use the formula CR = EBIT / IE.
4. Finally, calculate the Coverage Ratio (CR).
5. After inserting the variables and calculating the result, check your answer with the calculator above.

Example Problem:

Use the following variables as an example problem to test your knowledge.

Earnings Before Interest and Taxes (EBIT) = $150,000 Interest Expense (IE) =$30,000