1. What is Interest Coverage Ratio?

The Interest Coverage Ratio (ICR) is a financial metric used to determine how easily a company can pay interest on its outstanding debt. It measures a company's ability to meet its interest payments using its current earnings.

2. How Does the Calculator Work?

The calculator uses the ICR formula:

Where:

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

Explanation: The ratio shows how many times a company can cover its interest payments with its current earnings. Higher ratios indicate better financial health.

3. Importance of ICR Calculation

Details: Lenders and investors use ICR to assess a company's financial risk. A low ratio may indicate potential difficulty in meeting debt obligations.

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 signal financial difficulty, while a ratio above 2.5 is considered healthy, though this varies by industry.

Q2: How does ICR differ from debt-to-equity ratio?
A: ICR measures ability to pay interest, while debt-to-equity compares total liabilities to shareholders' equity.

Q3: Can ICR be negative?
A: Yes, if EBIT is negative, indicating the company is losing money before paying interest.

Q4: Why use EBIT instead of net income?
A: EBIT excludes taxes and interest, focusing purely on operating earnings available to pay interest.

Q5: How often should ICR be calculated?
A: Typically calculated quarterly with financial statements, or when assessing new debt or investment opportunities.