An Interest Coverage Ratio Calculator is a financial tool that automates the computation of a company’s ability to meet its interest obligations.
This calculator simplifies the process of determining how well a firm can cover its interest expenses with its available earnings.
Interest Coverage Ratio Calculator
| Company | EBIT ($) | Interest Expense ($) | ICR | Interpretation |
|---|---|---|---|---|
| Alpha | 1,000,000 | 200,000 | 5.0 | Strong |
| Beta | 500,000 | 300,000 | 1.67 | Concerning |
| Gamma | 2,000,000 | 400,000 | 5.0 | Strong |
| Delta | 750,000 | 100,000 | 7.5 | Excellent |
| Epsilon | 300,000 | 250,000 | 1.2 | High Risk |
What is Interest Coverage Ratio?
The Interest Coverage Ratio (ICR) is a crucial financial metric that measures a company’s ability to meet its interest obligations on outstanding debt. It indicates how many times a company can cover its interest expenses with its available earnings.
This ratio is essential for:
- Investors assessing a firm’s financial health
- Creditors evaluating loan risks
- Managers monitoring debt management efficiency
Interest Coverage Ratio Formula
The formula for calculating ICR is:
Interest Coverage Ratio = EBIT / Interest ExpensesWhere:
- EBIT: Earnings Before Interest and Taxes
- Interest Expenses: Total interest payable on all debt
Imagine Company X has:
- EBIT of $500,000
- Interest expenses of $100,000
ICR = $500,000 / $100,000 = 5
This means Company X can cover its interest obligations 5 times over with its current earnings.
How to Calculate Interest Coverage Ratio
To calculate ICR, follow these steps:
Determine EBIT: Start with net income and Add back interest and taxes
Identify Interest Expenses: Sum all interest payments on debt
Apply the Formula: Divide EBIT by Interest Expenses
Let’s consider Company Y:
- Net Income: $750,000
- Taxes Paid: $250,000
- Interest Expenses: $200,000
Step 1: Calculate EBIT
EBIT = Net Income + Taxes + Interest
EBIT = $750,000 + $250,000 + $200,000 = $1,200,000
Step 2: Identify Interest Expenses
Interest Expenses = $200,000
Step 3: Apply the Formula: ICR = $1,200,000 / $200,000 = 6
Company Y’s interest coverage ratio is 6, indicating strong ability to meet interest obligations.
What is Considered a Good Interest Coverage Ratio?
- ICR > 2: Considered acceptable
- ICR > 3: Indicates strong financial health
- ICR < 1.5: May signal potential financial distress
Consider two companies in different sectors:
Utility Company A: ICR of 2.5
Tech Startup B: ICR of 5
While both ratios are above 2, the interpretation differs:
- Utility Company A’s 2.5 ICR is solid, given the sector’s stable cash flows.
- Tech Startup B’s higher ICR reflects the volatility and growth expectations in tech.
References:
- Investopedia: Interest Coverage Ratio
- Corporate Finance Institute: Interest Coverage Ratio
- Harvard Business Review: Understanding Financial Statements
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