Interest Coverage Ratio Calculator
Calculate the interest coverage ratio from EBIT and interest expense, with a status against commonly cited healthy thresholds.
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Interest only — not principal repayment
Result
Interest Coverage Ratio
3.33x
Status
Healthy
How the Interest Coverage Ratio Is Calculated
The interest coverage ratio measures how easily a business can pay the interest on its outstanding debt from its operating earnings. Enter EBIT (earnings before interest and tax) and total interest expense for the period, and this calculator divides one by the other.
A ratio of 2-3x or higher is often cited as a common threshold for healthy interest coverage, meaning operating earnings comfortably exceed interest obligations. A ratio below 1.5x is generally seen as a warning sign, and below 1.0x means earnings don't even cover interest payments.
This is the simpler, more commonly cited coverage metric because it only looks at interest expense. The Debt Service Coverage Ratio (DSCR) is a related but stricter metric that divides income by total annual debt service — principal repayment plus interest combined — so DSCR is typically a lower, more conservative number than the interest coverage ratio for the same business.
Example
A company with $200,000 in EBIT and $60,000 in annual interest expense has an interest coverage ratio of 200,000 ÷ 60,000 ≈ 3.33x — comfortably above the commonly cited 2-3x healthy threshold.
Common Use Cases
- Assessing a company's ability to service its debt from operating earnings.
- Screening potential investments or loan applicants for financial risk.
- Tracking a company's coverage trend over time as debt or earnings change.
FAQs
What's a healthy interest coverage ratio?
A ratio of 2x to 3x or higher is commonly cited as healthy, though acceptable levels vary by industry and how cyclical or stable a company's earnings are. Capital-intensive industries with steady cash flows can sometimes operate safely at lower ratios than volatile-earnings businesses.
How is this different from the Debt Service Coverage Ratio (DSCR)?
This ratio divides EBIT by interest expense only. DSCR divides net operating income by total annual debt service, which includes both principal and interest. Because DSCR's denominator is larger, it typically produces a lower, more conservative ratio than interest coverage for the same business.
What does a ratio below 1.0x mean?
It means operating earnings aren't even sufficient to cover interest payments, which is a serious red flag that typically requires drawing on cash reserves, additional financing, or asset sales to stay current on debt.