Interest Coverage Ratio Calculator
Measure a company's ability to meet its interest payments on outstanding debt
| Ratio Range | Interpretation | Your Ratio | Status |
|---|---|---|---|
| Below 1.5 | Danger zone - may struggle with payments | - | - |
| 1.5 - 2.5 | Marginal coverage - some risk | - | - |
| 2.5 - 4.0 | Adequate coverage - acceptable risk | - | - |
| Above 4.0 | Strong coverage - comfortable position | - | - |
The Interest Coverage Ratio measures how easily a company can pay interest on outstanding debt. It compares earnings before interest and taxes (EBIT) to interest expenses.
• Increase operating profits
• Reduce debt levels
• Refinance at lower interest rates
• Improve operational efficiency
• Declining ratio over time
• Rising interest expenses
• Falling EBIT margins
• Ratio below industry average
A Interest Coverage Ratio (ICR) Calculator helps investors and creditors assess a company's ability to pay interest expenses on its outstanding debt. This critical financial metric determines how easily a business can service its debt obligations from operating profits.
How the Interest Coverage Ratio Calculator Works
Formula
Where:
EBIT = Operating profit before interest and taxes
Interest Expense = Total interest payments due for the period
Example Calculation
| Financial Data | Amount ($M) |
|---|---|
| EBIT | 50 |
| Interest Expense | 10 |
| ICR | 5.0 (50 ÷ 10) |
Interpretation:
> 3.0: Strong ability to pay interest (safe zone)
1.5 - 3.0: Moderate risk (monitor closely)
< 1.5: Danger zone (may struggle with payments)
< 1.0: Earnings insufficient to cover interest
Key Inputs Required
EBIT (Operating Income) from income statement:
Revenue - COGS - Operating Expenses
Or: Net Income + Interest + Taxes
Interest Expense:
All interest payments (short & long-term debt)
Exclude principal repayments
Why This Ratio Matters
✅ Debt Servicing Capacity - Measures margin of safety for interest payments
✅ Credit Risk Assessment - Lenders use this for loan approvals
✅ Investment Decisions - Helps evaluate financial stability
✅ Early Warning Signal - Declining ICR predicts potential distress
Industry Benchmarks
| Industry | Healthy ICR Range | Reasoning |
|---|---|---|
| Utilities | 2.0 - 4.0 | Stable cash flows support moderate ratios |
| Technology | 8.0 - 15.0 | Typically low debt levels |
| Manufacturing | 4.0 - 6.0 | Moderate capital intensity |
| Airlines | 1.5 - 3.0 | High fixed costs and leverage |
How to Improve Your Ratio
✔ Increase Operating Profits - Boost revenue or reduce COGS
✔ Refinance Debt - Secure lower interest rates
✔ Pay Down Debt - Reduce principal to lower interest obligations
✔ Restructure Operations - Improve operational efficiency
Limitations
⚠ Earnings Volatility - Doesn't account for cyclical EBIT swings
⚠ Cash Flow Blind Spot - Uses accrual-based EBIT, not actual cash
⚠ Capital Expenditures - Ignores required reinvestment needs
Related Ratios
| Ratio | Formula | What It Measures |
|---|---|---|
| Debt Service Coverage | (EBIT + Depreciation) ÷ (Interest + Principal) | Full debt payment ability |
| Fixed Charge Coverage | (EBIT + Lease Payments) ÷ (Interest + Lease Payments) | Includes lease obligations |
| EBITDA Coverage | EBITDA ÷ Interest | Broader earnings measure |
When to Recalculate
Before taking on new debt
During economic downturns
When interest rates rise significantly
Quarterly for financial health monitoring
Real-World Example: Apple vs. Boeing (2023)
Apple: 28.5x ($109B EBIT ÷ $3.8B interest)
Boeing: 1.2x ($3.1B EBIT ÷ $2.6B interest)
Analysis: Apple's strong ratio reflects massive cash generation, while Boeing operates near the danger zone
Final Thoughts
This ratio answers:
"How many times over could the company pay its interest bills from operating profits?"
Need help calculating yours? Share your EBIT and interest figures below! 💸📈