About the Interest Coverage Ratio Calculator
The interest coverage ratio, also called times interest earned, is EBIT / interest expense. A result of 4 means operating profit could pay the interest bill four times over. Lenders write covenants around this number precisely because it is hard to dress up: both inputs sit on the income statement and neither depends on a valuation judgment.
This page also reports EBITDA coverage, which adds depreciation and amortisation back before dividing. Those are non cash charges, so the EBITDA version is closer to the cash available to pay a coupon in the short run. It flatters heavy asset businesses, which is exactly why credit agreements often specify which of the two definitions applies.
Two extra lines make the result easier to act on. The cushion shows the profit left after interest is paid, in currency rather than as a multiple. The headroom line shows how far EBIT could fall before cover reaches one, the point at which operating profit only just pays the interest and nothing is left for tax, dividends or reinvestment. As a rough guide, cover below 1.5 is fragile, 1.5 to 3 is workable but watched, and above 3 is generally comfortable. Cyclical firms need more headroom than a regulated utility with predictable revenue. Pair this with the Operating Leverage Calculator to see how fast profit would drop if sales slipped.
How to use
- Enter EBIT, the operating profit before interest and tax.
- Type the interest expense for the same period from the income statement.
- Add depreciation and amortisation if you also want the EBITDA based cover.
- Read the headroom line to see how far profit could fall before cover reaches one.
Common questions
- What counts as a safe ratio?
- Most lenders look for at least three times cover in stable industries. Cyclical businesses are held to a higher bar because profit swings harder.
- Should I use interest paid or interest expense?
- Use the accrued expense from the income statement for comparability. Interest paid from the cash flow statement can differ due to timing.
- Why is EBITDA coverage higher?
- Depreciation and amortisation are added back, so the numerator grows while the interest bill stays the same.
- What if the company has no debt?
- With no interest expense the ratio is undefined, which is why this calculator needs an interest figure above zero.