Interest Coverage Ratio
Interest Coverage Calculator (Click Here or Scroll Down)
The formula for the interest coverage ratio is used to measure a company's earnings relative to the amount of interest that it pays. The interest coverage ratio is considered to be a financial leverage ratio in that it analyzes one aspect of a company's financial viability regarding its debt.
One consideration of the interest coverage ratio is that earnings can fluctuate more than interest expense. It is important to look at prior trends of a particular company as the interest coverage ratio does not consider future projected earnings. In addition, as with any financial formula, no one ratio or formula should be used in isolation.
Interest Coverage Ratio Formula Variables
The variable EBIT in the interest coverage ratio formula stands for earnings before interest and taxes. EBIT is also referred to as operating income, which is revenues minus operating expenses. Interest expense refers to the amount of interest the company pays on its debt.
Both EBIT and interest expense can be found on a company's income statement.
Use of the Interest Coverage Ratio Formula
Internally, a company may use this formula to review its ability to meet its obligations.
An investor may consider a company's trend in borrowing, revenues, expenses, and assets. The formula shown for the interest coverage ratio would bring one piece of the puzzle by evaluating a company's debt expense and revenue. An investor in bonds or a lender may pay more attention to a company's financial leverage to determine the likelihood of meeting its debt obligations.
- Formulas related to Interest Coverage Ratio
- Debt Coverage Ratio
*Disclaimer:This site is compensated for sales made through affiliate links. There is no additional cost to you and it keeps the site running.
Resources
Financial Education ←
Increase your knowledge in Finance and other topics through courses at Udemy. Financial course topics include Personal Finance, Financial Analysis, Investing, Tech Analysis, and more.
Start Learning Today! Udemy courses up to 50% off (affiliate)
Banking/Investment ←
Invest your spare change (microinvesting), save for retirement, and get bonuses while you shop through Acorns
Start Now! Get a $5 Sign Up Bonus for Acorns today! (Tier) (affiliate)