Interest Coverage Ratio Calculator
Calculate the Interest Coverage Ratio (ICR) to determine how many times a company's operating earnings cover its interest expense obligations.
How to use this tool
- Enter ebit (earnings before interest & tax) and interest expense in the fields above.
- Results update instantly as you type — or click Calculate.
- Read your interest coverage ratio and the full breakdown beneath it.
⚠ This tool provides general estimates for education only and is not financial, tax or legal advice. Figures may not reflect your situation — verify with a qualified professional.
Formula
Interest Coverage Ratio = EBIT / Interest Expense
Where EBIT = Earnings Before Interest and Taxes.
Safety Margin = (1 − 1/ICR) × 100% — the percentage by which EBIT can fall before interest payments cannot be met.
How it works
The Interest Coverage Ratio (also called Times Interest Earned) measures a company's ability to service its debt by comparing operating profit to interest obligations. A ratio below 1.0 signals the company cannot cover interest from operations. Generally, lenders and analysts consider a ratio above 2.0 acceptable and above 3.0 comfortable. The safety margin shows how much EBIT could decline before the company fails to cover interest costs.
Worked example
EBIT $500,000 and Interest Expense $100,000
- Interest Coverage Ratio = $500,000 / $100,000 = 5.00.
- Safety Margin = (1 − 1/5) × 100% = 80.00% — EBIT can fall by up to 80% before interest is uncovered.
ICR: 5.00x | Safety Margin: 80.00%
Common mistakes to avoid
- Using EBITDA instead of EBIT in the numerator without labeling the metric correctly: EBITDA/Interest is the EBITDA coverage ratio (used in some credit agreements) but is higher than true ICR and can overstate debt-servicing ability when depreciation represents real asset replacement needs.
- Using total interest expense including capitalized interest rather than the cash interest paid: capitalized interest does not require current cash outflow, so including it overstates the burden relative to operating cash flow.
- Ignoring lease obligations that are economically equivalent to debt: under IFRS 16 and ASC 842, operating leases are now on the balance sheet, and their implied interest should arguably be included for a complete picture of fixed charge obligations.
Key terms
- What is EBIT?
- Earnings Before Interest and Taxes — a measure of operating profit that excludes the effects of capital structure and tax regime.
- What does an ICR below 1 mean?
- The company is not generating enough operating income to pay its interest expense, indicating financial distress.
- What is a healthy interest coverage ratio?
- Generally, an ICR of 2 or above is considered safe; 3 or above is comfortable. Lenders often require a minimum ICR as a debt covenant.
- What is Times Interest Earned (TIE)?
- Another name for the Interest Coverage Ratio, calculated as EBIT divided by interest expense.
Frequently asked questions
- What ICR is considered safe for a typical company?
- Lenders generally require a minimum ICR of 1.5x to 2.0x as a covenant threshold. Investment-grade companies often maintain ICRs of 5x or higher. An ICR below 1.5x signals that operating earnings may not reliably cover interest expense, raising refinancing risk.
- How does EBITDA coverage ratio differ from EBIT coverage ratio?
- EBITDA adds back depreciation and amortization, producing a higher coverage multiple. This approximates cash generation more closely when D&A is large relative to maintenance capex. However, EBIT is more conservative because it acknowledges the real costs of asset wear. Credit analysts use both, depending on the asset intensity of the business.
- Does a declining ICR always signal financial distress?
- Not always. A company making aggressive capital investments may see temporary EBIT compression and rising interest expense from new debt, depressing ICR while positioning for future growth. Context matters: compare against historical trends, peers, and covenant thresholds before drawing conclusions.