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.

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## 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?

**First, determine the EBIT.**Calculate the total earnings before tax and interest.

**Next, determine the total interest expense.**Calculate the interest expense.

**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.