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.
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.
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
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.