**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 expenseswith 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 Expenses**

Where:

**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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