Interest Coverage Calculator Formula
Understand the math behind the interest coverage calculator. Each variable explained with a worked example.
Formulas Used
Interest Coverage Ratio
interest_coverage = interest_expense > 0 ? ebit / interest_expense : 0EBIT After Interest
safety_margin = ebit - interest_expenseVariables
| Variable | Description | Default |
|---|---|---|
ebit | EBIT (Earnings Before Interest & Taxes)(USD) | 400000 |
interest_expense | Annual Interest Expense(USD) | 80000 |
How It Works
How to Calculate Interest Coverage Ratio
Formula
Interest Coverage = EBIT / Interest Expense
This ratio focuses solely on interest payments, ignoring principal repayment. It tells you how many times over a company can pay its interest bill from operating earnings. A ratio below 1.5 raises red flags, while ratios above 3.0 indicate comfortable coverage. Creditors and bond-rating agencies rely heavily on this metric when assessing creditworthiness.
Worked Example
A company reports $400,000 EBIT and $80,000 in annual interest expense.
ebit = 400000interest_expense = 80000
- 01Interest Coverage = $400,000 / $80,000 = 5.0
- 02EBIT After Interest = $400,000 - $80,000 = $320,000
- 03The company can cover its interest payments 5 times over.
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