1. What is Interest Coverage Ratio?

The Interest Coverage Ratio (ICR) is a financial ratio that measures a company's ability to pay interest on its outstanding debt. It compares a company's earnings before interest and taxes (EBIT) to its interest expenses.

2. How Does the Calculator Work?

The calculator uses the ICR formula:

Where:

• \( EBIT \) — Earnings Before Interest and Taxes (USD)
• \( Interest\ Expense \) — Total interest payments (USD)

Explanation: The ratio shows how many times a company can cover its current interest payments with its available earnings.

3. Importance of ICR Calculation

Details: ICR is crucial for assessing a company's financial health and creditworthiness. Lenders and investors use it to evaluate the risk of lending to or investing in a company.

4. Using the Calculator

Tips: Enter EBIT and Interest Expense in USD. Both values must be positive, with Interest Expense greater than zero.

5. Frequently Asked Questions (FAQ)

Q1: What is a good Interest Coverage Ratio?
A: Generally, a ratio below 1.5 may indicate financial difficulties, while a ratio above 2.5 is considered healthy. The ideal ratio varies by industry.

Q2: Can ICR be negative?
A: Yes, if EBIT is negative, indicating the company is not generating enough revenue to cover its operating expenses before interest.

Q3: How does ICR differ from DSCR?
A: While ICR focuses only on interest payments, Debt Service Coverage Ratio (DSCR) considers both interest and principal repayments.

Q4: Should I use EBIT or EBITDA for ICR?
A: The standard formula uses EBIT. Some analysts use EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) for a more lenient view.

Q5: How often should ICR be calculated?
A: It should be monitored quarterly for public companies and at least annually for all businesses, or more frequently if financial conditions change.