What this calculator does
The interest coverage ratio measures how many times over a business could pay its interest bill out of its operating earnings, before tax. It is one of the standard checks lenders and analysts use to judge whether a company's debt load is sitting comfortably against what it actually earns.
The interest coverage ratio formula is simple: divide EBIT, earnings before interest and tax, by the interest expense for the same period. A ratio of 1.0 means earnings exactly cover the interest bill with nothing left over; anything below that means operating earnings alone are not enough to meet interest payments.
The formula
Divide EBIT by interest expense for the same period. The result is a multiple: a ratio of 5 means operating earnings are five times the interest expense that has to be paid.
| Term | Meaning |
|---|---|
| EBIT | Earnings before interest and tax, the operating profit a business generates before financing costs and tax are deducted. |
| Interest expense | The total interest paid or payable on the business's debt over the same period as the EBIT figure. |
| Interest coverage ratio | EBIT divided by interest expense, expressed as a multiple such as 5.00x. |
The inputs explained
| Field | What to enter |
|---|---|
| EBIT (operating earnings) ($) | Earnings before interest and tax for the period, see the EBIT calculator if this needs working out from net income first. |
| Interest expense ($) | Total interest expense on all debt for the same period. |
When to use it
Assessing a loan application
A lender reviewing a business loan application typically wants to see a comfortable interest coverage ratio, since it shows earnings can absorb the new debt's interest payments even if profits soften.
Checking a company before investing
A falling interest coverage ratio over several periods can be an early warning sign that earnings are weakening relative to the debt load, well before the numbers show up elsewhere.
Deciding how much more debt a business can take on
Modelling interest coverage ratio at a higher, prospective interest expense shows how much borrowing headroom remains before the ratio drops to an uncomfortable level.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
How the interest coverage ratio changes as interest expense rises at a fixed EBIT
A fixed $250,000 in operating earnings, against a range of interest expense levels.
| Interest expense | Interest coverage ratio | Reading |
|---|---|---|
| $25,000 | 10.00× | Comfortable: earnings cover interest several times over |
| $50,000 | 5.00× | Comfortable: earnings cover interest several times over |
| $100,000 | 2.50× | Adequate: a common minimum lenders look for |
| $150,000 | 1.67× | Adequate: a common minimum lenders look for |
| $200,000 | 1.25× | Weak: little buffer if earnings fall |
| $250,000 | 1.00× | Weak: little buffer if earnings fall |
Questions
What is a good interest coverage ratio?
Lenders commonly look for a ratio of at least 1.5 to 3 as a rough minimum, though the acceptable level varies by industry and how stable a business's earnings are. A ratio below 1 means EBIT alone does not cover interest payments for that period.
How is this different from the EBIT calculator?
The EBIT calculator works out operating earnings from net income, interest and tax. This calculator takes that EBIT figure as an input and divides it by interest expense to produce the coverage ratio itself.
Should I use EBIT or EBITDA for this ratio?
EBIT is the traditional figure used for interest coverage, since it still deducts depreciation and amortisation as real costs of running the business. Some lenders instead use EBITDA for a more generous view; check which figure a specific lender or covenant requires.
Can the interest coverage ratio be negative?
Yes, if EBIT itself is negative, meaning the business made an operating loss before interest and tax are even considered. A negative ratio is a clear signal that operating earnings are not covering financing costs at all.
To work out EBIT itself from net income, interest and tax, use the EBIT calculator.