The interest coverage ratio is the ratio of EBIT (earnings before interest and taxes) to interest expense.
It is a measurement of a company’s earnings to the interest that they pay.
Interest Coverage Ratio = EBIT / Interest Expense
A company has an EBIT of $3,000 and interest expense of $3,000.
Interest Coverage Ratio = $3,000 / $3,000 = 1
Therefore, this company’s interest coverage ratio is 1.
- Accounting Tools – Interest Coverage Ratio – An overview of the interest coverage ratio with an example calculation.
- Investopedia – Interest Coverage Ratio – An analysis of the interest coverage ratio and a description of where it is used.
- The Balance – How to calculate the interest coverage ratio – Some background information on the interest coverage ratio and how to calculate it.