Interest Coverage Ratio

A printable cheatsheet with calculations
and notes

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Interest Coverage Ratio

Interest Coverage Ratio =

Net Operating Income

Total Interest Expense

AKA: Debt Coverage Ratio:

INTERPRETATION

Business owners, managers, and other interested parties use it to determine how easily a company can pay interest on its outstanding debt.

Note: expanded calculation

Divide a company’s earnings before interest and taxes (EBIT) by its interest expense during a given period.

EXAMPLE

M&M’s earnings before interest and taxes are $50,000, and its interest and taxes are $15,000 and $5,000, respectively.

Interest coverage ratio = 50,000 / 20,000 = 2.5

A ratio of 2.5 means that M&M makes 2.5 times more earnings than its current interest payments.

BENCHMARK: HA, PG, EB, ROT

The general rule is that the higher the ratio, the better position a company has to repay its interest obligations.

A ratio below 1.5 indicates the company may struggle and be unable to pay its debt interest.

Interest Coverage Ratio:

ABBREVIATION KEY:

ROT: Rule of thumb
HA: Historical Average (organization’s historical average)
PG: Peer Group average
EB: Economic Benchmark

DISCLAIMER: The interactive calculators on this site are self-help tools intended to help you visualize and explore your financial information. They are not intended to replace the advice of a qualified professional. Because each business is different, we can not guarantee accuracy.