Interest Coverage Ratio Calculator Guide
Interest Coverage Ratio
Interest coverage ratio (ICR) measures how comfortably a company’s operating earnings can cover its interest obligations. Higher coverage indicates lower risk of default.
Formula
ICR = EBIT / interest expense
Variant: EBITDA / interest when comparing companies with different depreciation intensity.
Example
EBIT $120k, interest $30k → ICR = 120 / 30 = 4.0× coverage. Using EBITDA $150k: 150 / 30 = 5.0×.
Interpreting Coverage
- ≤1.0×: earnings do not cover interest—high risk.
- 1.5–2.5×: vulnerable in downturns—monitor leverage and cash buffers.
- 3.0–5.0×: generally comfortable coverage for many industries.
- 5.0×+: strong coverage; room for investment or de‑leveraging.
Step‑by‑Step
- Start with operating income (EBIT) or EBITDA.
- Find interest expense for the period (income statement).
- Divide EBIT (or EBITDA) by interest expense to get coverage.
- Compare to historical periods and peers to assess risk.
Pitfalls
- Using one‑time EBIT spikes; normalize for sustainable operations.
- Ignoring variable interest rates that may rise and reduce coverage.
- Comparing across industries with different capital intensity.
Quick Diagnostic
Track coverage and interest rate trend together. If coverage falls while rates rise, prioritize debt paydown or refinancing.
FAQs
EBITDA vs. EBIT?
EBITDA removes non‑cash D&A to compare operating cash potential; EBIT reflects asset intensity.
Thresholds?
Acceptable coverage varies by industry and lender covenants; cyclical sectors target higher buffers.