Interest Cover Ratio Calculator
How easily a company can pay interest on its outstanding debt.
Formula first
Overview
The Interest Coverage Ratio assesses a firm's ability to service its debt by comparing earnings before interest and taxes to annual interest obligations. It functions as a financial safety metric, indicating how many times a company can pay its current interest using its operating income.
Symbols
Variables
IC = Interest Cover, OP = Operating Profit, INT = Interest Exp
Apply it well
When To Use
When to use: Analysts use this ratio when assessing the creditworthiness of a business or evaluating the risk of a potential investment in corporate bonds. It is most effective when comparing companies within the same industry or tracking a single firm's performance over several fiscal periods.
Why it matters: Maintaining a healthy ratio ensures a company can survive temporary downturns in revenue without defaulting on its debt. High interest coverage often leads to better credit ratings, lower borrowing costs, and increased confidence from equity shareholders.
Avoid these traps
Common Mistakes
- Using net profit instead of operating profit (PBIT).
One free problem
Practice Problem
A manufacturing firm reports an operating profit of 500,000 and has annual interest expenses of 125,000 on its bank loans. Calculate the firm's interest cover ratio.
Solve for:
Hint: Divide the profit generated from operations by the total interest due.
The full worked solution stays in the interactive walkthrough.
References
Sources
- Investopedia: Interest Coverage Ratio
- Financial Accounting by Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso
- Wikipedia: Interest coverage ratio
- Brigham, Eugene F., and Joel F. Houston. Fundamentals of Financial Management.
- Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2022). Fundamentals of Corporate Finance (13th ed.). McGraw-Hill Education.
- AQA A-level Business Specification