Interest Coverage Ratio Calculator

Select Currency:

Financial Information

EBIT

$

Interest Expense

$

Coverage Results

Interest Coverage Ratio

-

times

EBIT ÷ Interest Expense

EBIT

-

USD

Earnings Before Interest and Taxes

Interest Expense

-

USD

Annual interest payments on debt

Calculate to see interest coverage assessment

Coverage Analysis

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	-	-

About Interest Coverage Ratio

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.

Improving Coverage

• Increase operating profits

• Reduce debt levels

• Refinance at lower interest rates

• Improve operational efficiency

Warning Signs

• Declining ratio over time

• Rising interest expenses

• Falling EBIT margins

• Ratio below industry average

Export Results

This calculator provides estimates only. Ideal ratios vary by industry.

Calculation History

Date	EBIT	Interest Expense	Coverage Ratio	Status	Currency	Actions

No Calculation History

Your calculation history will appear here after you save calculations.

Calculation saved to history

Understanding Interest Coverage Ratio

Your Complete Guide to Measuring Debt Repayment Ability with Our Calculator

Imagine you're running a business and you have loans to repay. How do you know if you can comfortably make those interest payments? That's where the Interest Coverage Ratio comes in - it's like a financial stress test for your business!

This guide will walk you through everything you need to know about this important financial metric, complete with real examples, easy formulas, and our interactive calculator that does all the math for you.

What Is Interest Coverage Ratio?

Interest Coverage Ratio (ICR) is a simple but powerful number that tells you how easily a company can pay interest on its outstanding debt. Think of it as measuring your business's breathing room - how many times over you could pay your interest bills with the money you earn.

Simple Example:

If your business earns $100,000 before interest and taxes, and your interest payments are $20,000 per year:

• You earn 5 times more than your interest bill
• Your Interest Coverage Ratio would be 5
• This means you can cover interest payments 5 times over

Try Our Interest Coverage Ratio Calculator

No complex math needed! Just enter your numbers and get instant results with clear explanations.

The Simple Formula Behind the Calculator

The Magic Formula:

Interest Coverage Ratio = EBIT ÷ Interest Expense

Where EBIT = Earnings Before Interest and Taxes

Let's break this down into simple terms:

What is EBIT?

EBIT (Earnings Before Interest and Taxes) is your company's profit before paying interest and taxes. It's calculated by subtracting all operating expenses from your revenue, but NOT including interest or taxes.

EBIT Example:

A small bakery has:

• Revenue: $200,000
• Operating Expenses: $150,000 (ingredients, salaries, rent)
• EBIT = $200,000 - $150,000 = $50,000

This $50,000 is available to pay interest and taxes.

What is Interest Expense?

Interest Expense is the total amount your business pays in interest on all its loans and debts during a specific period (usually one year).

Interest Expense Example:

Our bakery has:

• Business loan: $10,000 per year interest
• Equipment financing: $5,000 per year interest
• Total Interest Expense = $15,000

Putting It All Together

Complete Calculation Example:

Using our bakery example:

ICR = $50,000 ÷ $15,000 = 3.33

This means the bakery earns 3.33 times more than its interest payments. For every $1 of interest, it earns $3.33 before interest and taxes.

What Does Your Ratio Mean?

Not all ratios are created equal! Here's how to interpret your results:

Ratio Range	What It Means	Financial Health
Below 1.5	Danger zone - May struggle to make interest payments	⚠️ Weak
1.5 - 2.5	Marginal coverage - Some risk during tough times	⚠️ Moderate Risk
2.5 - 4.0	Adequate coverage - Can comfortably cover interest	✅ Good
Above 4.0	Strong coverage - Excellent financial position	🏆 Excellent

Pro Tip: Industry Matters!

What's "good" varies by industry. Capital-intensive industries (like manufacturing) typically have lower ratios than service businesses. Always compare to industry averages!

Key Features of Our Calculator

50+ Currencies

Calculate in your local currency - we support everything from US Dollars to Japanese Yen and Euro.

History Tracking

Save your calculations and track changes over time to see how your financial health is improving.

Export Options

Save results as PDF, HTML, or text files for reports, presentations, or sharing with advisors.

Detailed Analysis

Get more than just a number - we provide clear explanations and actionable insights.

How to Use the Calculator (Step by Step)

Step 1: Enter Your EBIT

Enter your company's Earnings Before Interest and Taxes. If you're not sure:

• For small businesses: Your profit before loan interest and taxes
• Formula: Revenue - Operating Expenses
• Example: If you made $100,000 and spent $60,000 on operations, EBIT = $40,000

Step 2: Enter Interest Expense

Enter the total annual interest you pay on all business loans and debts. Include:

• Bank loan interest
• Credit card interest (business cards)
• Equipment financing interest
• Any other business debt interest

Step 3: Select Your Currency

Choose from 50+ currencies - we'll handle all the formatting for you!

Quick Calculation Tip

Our calculator automatically saves your inputs as you type. No need to click "save" - we've got you covered!

Real-World Applications

For Business Owners

• Loan Applications: Banks love seeing ratios above 2.5-3.0
• Financial Planning: Know when you can safely take on more debt
• Business Health Check: Monitor your financial strength over time

For Investors

• Company Analysis: Compare companies in the same industry
• Risk Assessment: Identify companies with debt troubles
• Investment Decisions: Avoid companies with dangerously low ratios

Frequently Asked Questions (15 Common Questions)

1. What's a "good" Interest Coverage Ratio?

Generally, a ratio above 2.5 is considered good, but it varies by industry. Manufacturing companies might be comfortable at 2.0, while software companies should aim for 3.5+. Always compare to industry averages.

2. Can the ratio be too high?

Yes! Extremely high ratios (above 10) might mean you're too conservative with debt. Some debt can help grow your business faster through leverage. It's about finding the right balance for your goals.

3. What if my ratio is below 1?

A ratio below 1 means your business isn't earning enough to cover interest payments. This is a serious warning sign that needs immediate attention. Consider reducing debt, increasing profits, or both.

4. How often should I calculate this ratio?

At least quarterly for active monitoring. Calculate monthly if you have significant debt or are experiencing rapid growth or decline. Our history feature makes tracking easy!

5. Does this calculator work for personal finance?

Yes! While typically used for businesses, you can adapt it for personal use. Use your pre-tax income as "EBIT" and all personal loan/card interest as "Interest Expense."

6. What's the difference between EBIT and Net Income?

EBIT excludes interest and taxes, while Net Income includes them. EBIT shows your core operating profitability, making it better for comparing companies with different debt levels or tax situations.

7. Should I include lease payments in interest expense?

For operating leases, no. But under modern accounting rules, many leases must be included. When in doubt, include all financing costs to be conservative.

8. How can I improve my Interest Coverage Ratio?

Two main ways: 1) Increase EBIT by growing revenue or reducing costs, or 2) Decrease interest expense by paying down debt or refinancing at lower rates.

9. Why do lenders care about this ratio?

Lenders want to know you can comfortably make payments. A higher ratio means lower risk for them, which can lead to better loan terms and interest rates for you.

10. What's the difference between ICR and Debt Service Coverage Ratio?

ICR only looks at interest payments. Debt Service Coverage Ratio (DSCR) looks at total debt payments (principal + interest). DSCR is more comprehensive but more complex.

11. Can I calculate this for future projections?

Absolutely! Use projected EBIT and interest expense to see how potential decisions (like taking a new loan) might affect your ratio. Our calculator makes what-if analysis easy.

12. What if my business is seasonal?

Use annual figures or calculate for your slow season (worst-case scenario). Our history feature helps track seasonal patterns over time.

13. How does this ratio affect business valuation?

Businesses with strong coverage ratios often command higher valuations because they're less risky and have more financial flexibility for growth.

14. Should startups be concerned about this ratio?

Yes, but differently. Early-stage startups may have low or negative ratios while investing in growth. The key is showing improvement over time and having a path to profitability.

15. Can I save and compare multiple calculations?

Yes! Our history feature lets you save unlimited calculations and export them for comparison. Perfect for tracking progress or comparing different scenarios.

Final Thoughts

The Interest Coverage Ratio is like a financial thermometer for your business - it quickly tells you if you have a fever (debt problems) or if you're in good health. While it's just one number among many financial metrics, it's a crucial one that lenders, investors, and smart business owners watch closely.

Our calculator makes this complex financial concept simple and accessible. Whether you're a seasoned CFO or a first-time business owner, you can get accurate, meaningful results in seconds.

Remember:

Numbers tell a story, but context gives them meaning. Use our calculator as a starting point for deeper financial conversations and planning. Your business's financial health is worth understanding!