Interest Coverage Ratio Calculator

What is the Interest Coverage Ratio?

The Interest Coverage Ratio (ICR) is a fundamental financial metric used to evaluate a company's ability to pay interest on its outstanding debt. It measures how many times a business can cover its annual interest expenses using its operating profit or EBIT (Earnings Before Interest and Taxes).

Interest Coverage Ratio Formula

The formula to calculate the interest coverage ratio is straightforward:

$$\text{Interest Coverage Ratio} = \frac{\text{EBIT}}{\text{Interest Expense}}$$

Where:

• EBIT: Earnings Before Interest and Taxes (Operating Profit = Revenue - Operating Expenses).
• Interest Expense: Total interest obligations due on short-term and long-term borrowing during the period.

Interpreting Interest Coverage Ratio Values

• Greater than 3.0: Indicates a healthy financial cushion. Lenders consider the business low risk.
• Between 1.5 and 3.0: Acceptable coverage for stable industries, but leaves less margin for revenue drops.
• Between 1.0 and 1.5: Warning sign. The company earns just barely enough to cover interest costs.
• Less than 1.0: Critical financial distress. The business cannot generate sufficient operating profit to meet interest payments without using reserves or taking on additional debt.

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