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.
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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.
- First, determine the Earnings Before Interest and Taxes (EBIT).
- Next, determine the Interest Expense (IE).
- Use the formula CR = EBIT / IE.
- Finally, calculate the Coverage Ratio (CR).
- 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
