What is my interest coverage ratio?
Enter operating income (EBIT) and interest expense from an income statement. Or start from net income and add back the income tax expense; the calculator adds the interest back too.
- Interest coverage ratio
- 21.5
EBIT of $43,000.00 is 21.5 times the interest expense of $2,000.00.
- EBIT (operating income)
- $43,000.00
Interest coverage ratio: 21.5. EBIT of $43,000.00 is 21.5 times the interest expense of $2,000.00.
The results are estimates for information only. They are not financial, tax, or legal advice. Check the numbers with your lender or a qualified professional before you decide. Terms of use
How to calculate
Computes the interest coverage ratio (times interest earned): earnings before interest and taxes divided by interest expense, from EBIT or from net income.
Example with the default inputs (Start from Operating income (EBIT), Operating income (EBIT) $43,000.00, Interest expense $2,000.00): EBIT of $43,000.00 is 21.5 times the interest expense of $2,000.00.
Method: From operating income: EBIT as typed. From net income: EBIT = net income + interest expense + income tax expense. Interest coverage ratio = EBIT ÷ interest expense.
- All amounts are for the same period, from one income statement.
- Interest expense is the interest on all debt; income tax expense may be negative for a tax benefit.
- Arithmetic is exact on the typed decimals; the ratio shows to 2 decimals and money to the cent, halves up.
Worked examples
Each example is checked against the calculator on every build.
- Start from Operating income (EBIT), Operating income (EBIT) $43,000.00, Interest expense $2,000.00 gives Interest coverage ratio 21.5, EBIT (operating income) $43,000.00.Source: OpenStax, Principles of Finance, 6.4 Solvency Ratios (times interest earned = EBIT ÷ interest expense; Clear Lake Sporting Goods $43,000 ÷ $2,000 = 21.5 times). https://openstax.org/books/principles-finance/pages/6-4-solvency-ratios: 43,000 ÷ 2,000 = 21.5
- Start from Net income, Net income $35,000.00, Income tax expense $6,000.00, Interest expense $2,000.00 gives Interest coverage ratio 21.5, EBIT (operating income) $43,000.00.Source: OpenStax, Principles of Finance, 5.1 The Income Statement (Clear Lake Sporting Goods: operating income $43,000 and $38,000, interest $2,000 and $3,000, income tax $6,000, net income $35,000). https://openstax.org/books/principles-finance/pages/5-1-the-income-statement: 35,000 + 2,000 + 6,000 = 43,000; OpenStax, Principles of Finance, 6.4 Solvency Ratios (times interest earned = EBIT ÷ interest expense; Clear Lake Sporting Goods $43,000 ÷ $2,000 = 21.5 times). https://openstax.org/books/principles-finance/pages/6-4-solvency-ratios
- Start from Operating income (EBIT), Operating income (EBIT) $38,000.00, Interest expense $3,000.00 gives Interest coverage ratio 12.666667.Source: OpenStax, Principles of Finance, 5.1 The Income Statement (Clear Lake Sporting Goods: operating income $43,000 and $38,000, interest $2,000 and $3,000, income tax $6,000, net income $35,000). https://openstax.org/books/principles-finance/pages/5-1-the-income-statement
- Start from Operating income (EBIT), Operating income (EBIT) -$10,000.00, Interest expense $4,000.00 gives Interest coverage ratio -2.5.Source: OpenStax, Principles of Finance, 6.4 Solvency Ratios (times interest earned = EBIT ÷ interest expense; Clear Lake Sporting Goods $43,000 ÷ $2,000 = 21.5 times). https://openstax.org/books/principles-finance/pages/6-4-solvency-ratios (formula)
- Start from Net income, Net income -$2,500.00, Income tax expense $0.00, Interest expense $1,250.50 gives Interest coverage ratio -0.9992, EBIT (operating income) -$1,249.50.
How it works
- From operating income: EBIT as you type it
- From net income: EBIT = net income + interest expense + income tax expense
- Interest coverage ratio = EBIT ÷ interest expense
Rules:
- EBIT, net income and income tax expense may be negative (a loss or a tax benefit). Interest expense must be more than $0. Each amount is at most $1 quadrillion in size.
- A ratio too large to show as a number gives no answer. So does a ratio that is not 0 but too small to show as a number.
- The arithmetic is exact on the decimals you type. The ratio shows to 2 decimals and money to the cent, with halves rounded up (away from 0).
Assumptions
- All amounts are for the same period, from one income statement.
- Starting from net income assumes there is no other income or expense between operating income and income before taxes besides interest.
Worked examples by hand
Clear Lake Sporting Goods, current year. EBIT $43,000 and interest expense $2,000: ratio = 43,000 ÷ 2,000 = 21.5.
The same year from net income. Net income $35,000 + interest $2,000 + income tax $6,000 = $43,000 of EBIT, so the ratio is again 21.5.
Clear Lake Sporting Goods, prior year. EBIT $38,000 and interest expense $3,000: ratio = 38,000 ÷ 3,000 = 12.67.
An operating loss. EBIT −$10,000 and interest expense $4,000: ratio = −2.5.
A net loss with no tax. Net income −$2,500, interest expense $1,250.50, no income tax: EBIT = −2,500 + 1,250.50 = −$1,249.50, and the ratio is −1,249.50 ÷ 1,250.50 = −0.9992, shown as −1.
Other questions people ask
What is the interest coverage ratio?
The interest coverage ratio, also called the times interest earned (TIE) ratio, shows how many times a company could pay its interest expense out of its operating income. It measures how easily a business can pay the interest on its debt.
How do I calculate the interest coverage ratio?
Divide earnings before interest and taxes (EBIT) by interest expense. Clear Lake Sporting Goods had operating income of $43,000 and interest expense of $2,000, so its ratio was 43,000 ÷ 2,000 = 21.5 times.
How do I get EBIT from net income?
Add interest expense and income tax expense back to net income. Clear Lake's net income was $35,000 after $2,000 of interest and $6,000 of income tax, so its EBIT was 35,000 + 2,000 + 6,000 = $43,000.
What is a good interest coverage ratio?
Higher is safer: it leaves more room for profits to fall before interest becomes hard to pay. A ratio of 1 means operating income just covers the interest, and below 1 it does not. Lenders set their own minimums, which vary by industry.
What does a negative interest coverage ratio mean?
The business had an operating loss, so its operations did not earn anything toward the interest. An operating loss of $10,000 with $4,000 of interest expense gives a ratio of −2.5.
How is interest coverage different from the debt service coverage ratio?
Interest coverage compares operating income with interest only. The debt service coverage ratio compares cash available with all debt payments due, interest and principal, so it is the stricter test of whether a borrower can repay.