Interest Coverage Ratio Calculator - Glossary:Interest Coverage Ratio: Shows the proportion of Earnings Before Interest & Tax (EBIT) and Interest Expense. In simple words, measures a company's ability to make interest payments on its debt in a timely manner.
How to use this equation?This is an income statement component; the values are commonly stated against EBIT and Interest Expense. To use this ratio, divide the EBIT by Interest expense.
Earnings Before Interest & Tax (EBIT):
Profit before deducting all its interest & taxes.
Interest expense is the cost of debt - the amount paid for servicing the amount borrowed by the company.
Interest coverage ratio for a company with a net income of $100,000 and interest expense of $25,000 is 4 times. It can meet its interest payments 4 times of its earnings. Interest coverage ratio lower than 1.5 times means a company is vulnerable and may face difficulties to meet its interest payments.