Interest Coverage Ratio Calculator

How it is calculated

The interest coverage ratio is ICR = EBIT / interest expense. EBIT is earnings before interest and taxes for a period, and interest expense is the interest due over the same period. Use the same currency and the same period for both. The result tells you how many times operating profit covers the interest bill; the higher it is, the more room before interest becomes a problem. Interest must be greater than zero, otherwise there is no result (a company with no interest has nothing to cover). EBIT may be negative, which gives a negative ratio. What counts as a safe level depends on the sector and on how stable profits are.

Common mistakes

• Using net income instead of EBIT, which is already after interest and tax.
• Mixing periods, such as annual EBIT with quarterly interest.
• Leaving out capitalised interest or lease interest in the expense, which flatters the ratio.
• Treating a single year as typical: a ratio from a peak year can hide thin cover in a weak year.
• Using EBITDA instead of EBIT, which ignores depreciation and gives a higher ratio.