This interest coverage ratio calculator can help you assess a company’s ability to pay the interest on its debts by comparing its interest expense with the EBIT value. Below the tool there is more information about the formula applied.
How does this interest coverage ratio calculator work?
The formula applied by this interest coverage ratio calculator considers the figure of the earnings before interest & taxes and the one of the total interest expenses within a year. Please note that the principal payments are not taken into account in the calculation:
Interest coverage ratio (ICR) = EBIT / Interest expenses
It indicates the number of times an entity could cover the yearly interest payments on its debts from its EBIT, which can be translated as the capacity to support its interest expenses.
In the specialty literature ICR is also known as the times interest earned ratio, while apart from the equation provided above it can be found in one of the following formats as well:
ICR = EBIT / Finance costs
ICR = Annual income before interest and income tax expenses / Annual interest expense
The interpretation of the interest coverage ratio level
Any level equal or lower than 1.5 (150%) is considered an alarming level, while an interest coverage ratio below 1 (100%) demonstrates that the corporation has serious difficulties since its level of earnings is insufficient to pay in due time its interest expenses.
In case the interest coverage ratio is lower, this level is interpreted a negative signal as it indicates that the company's debt burden is high too and so the higher the likelihood of bankruptcy. In other words the business in question has less earnings available to support its interest expenses which makes it vulnerable in case the interest rates increase.
To conclude the higher the interest coverage ratio is the better for the company. However, the levels interpreted as acceptable or positive depend from one industry to another, from one competitor to another and from one economic context to another.
Example of a ICR calculation
To explain the interest coverage ratio concept, let's assume that a company's latest annual income statement showed a net income after tax of $100,000; interest expenses of $20,000 and income tax expense of $15,000.
Considering these figures, the company's annual earnings before interest and income tax expenses is $135,000 ($100,000 + $20,000 + $15,000). Thus the entity's interest coverage ratio is 6.75 ($135,000/$20,000).30 Apr, 2015 | 0 comments