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Using the Present Value Calculator, you can calculate the present value, discount rate, future value, and the number of periods by inputting the other variables required for the calculation.
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The interest coverage ratio (ICR) tells you whether a company can actually pay the interest on its debt out of operating profit. Divide earnings before interest and taxes (EBIT) by interest expense and you get the ratio. A 5 means the company earns five times what it owes in interest. A 0.8 means it isn't earning enough to cover the bill. Lenders, bond analysts, and CFOs all watch this number, especially when a business is loading up on debt or moving through a rough patch.
The ICR counts how many times current operating earnings could cover the company's interest bill for the period. EBIT goes on top because it strips out financing decisions and tax planning that would muddy the picture of operations. Interest expense goes on the bottom and should pick up every interest payment for the period: bonds, term loans, revolvers, capital leases.
You will sometimes see this called the times interest earned (TIE) ratio. Same calculation, different name.
Enter EBIT for the period you care about; pull it from the income statement, right above the interest expense line. Add the total interest expense for that same period. The ratio appears below.
You can run it backwards too. Plug in a target ratio plus current interest expense to see what EBIT you would need to hit it. Or plug in a target ratio with current EBIT to find the maximum interest expense you can afford. Useful when you are stress-testing a new loan or modeling a refinance.
Banks run the ICR before approving credit. A ratio above 3 is usually enough to clear the basic underwriting bar. Equity analysts pair it with debt-to-EBITDA and free cash flow to compare companies in the same industry. CFOs watch it quarterly and start flagging it the moment it trends down.
It matters most right before something changes. Before adding new debt for an expansion, the finance team forecasts EBIT and checks whether the post-deal ratio still holds. Private equity firms model it for every LBO target because the whole deal thesis depends on the operating business covering a much larger interest load. Credit rating agencies fold it into their scoring formula, so a drift from 4 to 2 can show up as a downgrade six months later.
The rough scale most analysts use: above 3 is comfortable, 2 to 3 is fine but worth watching, below 2 means the business is one bad quarter away from trouble, and below 1 means it is already there.
Context changes the read though. A utility or pipeline company carries heavy debt by design, so a 2 there is healthy and normal. A SaaS company with almost no debt might post a 30, and that is not necessarily good news either; it can mean they are under-leveraged and leaving cheap capital on the table. The useful comparison is against the company's own three- to five-year history and against direct industry peers, not against a universal cutoff.
Use the same window for EBIT and interest expense. Trailing twelve months works well; mixing a quarterly EBIT with annual interest will skew the ratio by a factor of four.
Strip one-time items out of EBIT. A goodwill impairment, restructuring charge, or gain on a divestiture will move the ratio for reasons that have nothing to do with the operating business.
Pick up every interest expense, including capital lease interest, which sometimes sits below the main interest line on the income statement.
Look at the three- or five-year trend. The direction of the line matters more than the latest snapshot, especially for cyclical businesses.
Benchmark against companies in the same industry. A 2 in food retail and a 2 in enterprise software are very different signals.
EBIT coverage uses operating earnings as reported. EBITDA coverage adds depreciation and amortization back in, so the number comes out higher. EBITDA is friendlier to capital-intensive businesses because it ignores the non-cash drag of equipment depreciation, but that depreciation is real in the sense that the underlying assets wear out and have to be replaced. Most credit analysts look at both.
Yes, in a sense. A ratio of 20 or 30 is not itself a problem, but it sometimes signals that the company is not using debt at all when borrowing would be cheap. Tax-deductible interest plus a moderate debt load tends to improve return on equity. The trade-off is the loss of flexibility when the next downturn hits, so very high coverage is usually a deliberate choice rather than an accident.
Public companies effectively report it every quarter through earnings filings. Internal finance teams tend to refresh it monthly alongside the management report. From the outside, the trailing twelve-month figure is the safer number to use because it smooths out seasonal swings that would mislead you over a single quarter.
Using the Present Value Calculator, you can calculate the present value, discount rate, future value, and the number of periods by inputting the other variables required for the calculation.
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Interest Coverage Ratio Calculator
Calculate interest coverage ratio instantly. Assess your company's ability to meet debt obligations with our free ICR calculator. Enter EBIT and interest expense for instant results.
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Finance
Corporate Finance