Enter the earnings before interest and tax and the total interest expense into the calculator. The calculator will evaluate and display the interest coverage ratio.

## Interest Coverage Ratio Formula

The following equation can be used to calculate the interest coverage ratio of a business.

ICR = EBIT / IE
• Where ICR is the interest coverage ratio
• EBIT is the earnings before tax and interest
• IE is the total interest expense.

Earnings before tax and interest is a measure of a company’s profitability calculated by subtracting all expenses except for taxes and interest from its total revenue.

Total interest expense refers to the sum of all interest payments made by a borrower over a specific period.

## Interest Coverage Ratio Definition

Interest Coverage Ratio is a financial metric used to assess a company’s ability to meet its interest obligations on outstanding debt. It is calculated by dividing a company’s earnings before interest and taxes (EBIT) by its interest expenses.

The interest coverage ratio provides insight into a company’s ability to generate enough operating income to cover its interest payments. A higher ratio indicates that a company has a greater ability to meet its interest obligations, while a lower ratio suggests a higher risk of defaulting on debt payments.

This ratio is crucial for both investors and lenders as it helps them evaluate the financial health and solvency of a company. A strong interest coverage ratio reassures investors that a company can generate sufficient earnings to comfortably pay off its debt, thus reducing the risk of potential defaults. Lenders also rely on this ratio to assess the creditworthiness of a company before extending loans or determining interest rates.

Furthermore, the interest coverage ratio is a key indicator of a company’s operational efficiency and profitability. A higher ratio implies that a company has healthy earnings relative to its interest expenses, signaling strong financial performance. Conversely, a lower ratio may indicate financial distress or poor profitability, which can be a warning sign for investors and creditors.

## Interest Coverage Ratio Example

How to calculate an interest coverage ratio?

1. First, determine the EBIT.

Calculate the total earnings before tax and interest.

2. Next, determine the total interest expense.

Calculate the interest expense.

3. Finally, calculate the interest coverage ratio.

Use the equation above to calculate the interest coverage ratio.

## FAQ

What is an interest coverage ratio?

An interest coverage ratio is a ratio of the total EBIT to the total interest expenses of a company or business.