What coverage do lenders want?

Commonly three times or better, though it varies with sector and how stable the earnings are. Below one and a half is uncomfortable in any industry.

Businessfinance

Interest Coverage Ratio Calculator

Interest coverage on three bases, with the headroom before profit stops covering the interest bill. Lenders write covenants against this ratio, which is why the headroom figure matters more than the ratio itself.

Also called: times interest earned, debt service coverage.

Interest coverage

3.96

Operating profit covers interest 3.96 times, or 4.71 times on an EBITDA basis. Comfortable, and above the level most covenants require. Profit could fall 74.7% before interest stops being covered.

EBITDA coverage

4.71

Fixed charge coverage

3.37

EBITDA

₹1,13,00,000

Headroom before breach

74.7%

Assessment

Comfortable, and above the level most covenants require.

How this is calculated

Method and background

How this is calculated

Coverage is operating profit over interest. It uses profit before tax and interest because interest is paid from pre-tax earnings. The EBITDA version adds back depreciation, which is closer to the cash available, and lenders often write covenants against it. Fixed charge coverage adds leases to the denominator, since a lease commitment is as unavoidable as a loan. The headroom figure translates the ratio into the question that matters: how far can trading fall before this breaches.

operating profit against the interest bill, before tax because interest is deductible

EBIT: Earnings before interest and tax

Worked examples

Each of these is asserted on every build. If a change to the engine ever moved one of these answers, the build would fail before the page could print it.

a leveraged but covered business

Operating profit (EBIT): ₹95,00,000
Interest expense: ₹24,00,000
Depreciation and amortisation: ₹18,00,000
Lease payments: ₹6,00,000

Interest coverage3.96

95 lakh over 24 lakh

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coverage of exactly one has no headroom

Operating profit (EBIT): ₹24,00,000
Interest expense: ₹24,00,000
Depreciation and amortisation: ₹0
Lease payments: ₹0

Interest coverage1

boundary

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Method and limits

What it assumes

Interest is paid in cash in the period.

What it deliberately does not model

EBITDA is not cash flow. Capital expenditure it ignores is often unavoidable.
A single period can flatter or mislead if trading is seasonal or lumpy.

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Frequently asked questions

What coverage do lenders want?: Commonly three times or better, though it varies with sector and how stable the earnings are. Below one and a half is uncomfortable in any industry.