Interest Coverage Ratio Calculator
Earnings Versus the Interest Bill
Taking on debt is only safe if operating earnings comfortably exceed what that debt costs to service. The interest coverage ratio makes that comparison directly, dividing earnings before interest and taxes by the interest expense itself. A company can be profitable overall and still be one bad quarter away from missing an interest payment if this ratio is thin — which is exactly why lenders check it before, during, and after extending credit.
The Formula
How to Read the Result
This calculator classifies the result using the same thresholds built into its own logic:
| ICR | Interpretation |
|---|---|
| Below 1.0 | Not generating enough earnings to cover interest payments |
| 1.0 to just under 1.5 | Weak ability to cover interest payments |
| 1.5 to just under 3.0 | Adequate ability to cover interest payments |
| 3.0 or higher | Strong ability to cover interest payments |
Against $100,000 of interest expense, EBIT of $80,000 gives a ratio of 0.8 (insufficient), $150,000 gives 1.5 (adequate), and $400,000 gives 4.0 (strong).
Where This Calculation Matters
- Loan covenant compliance — many credit agreements set a minimum interest coverage ratio the borrower must maintain, with breach triggering renegotiation or default provisions.
- Refinancing decisions — a company evaluating whether it can safely take on additional debt checks how much the new interest expense would drag the ratio down.
- Credit rating analysis — interest coverage is a standard input in corporate credit rating methodologies, since it directly measures debt-servicing headroom.
- Early warning tracking — a ratio trending down toward 1.0 over several quarters, even while still above it, often prompts proactive cost-cutting or refinancing before a covenant breach occurs.
How to Use This Calculator
- Enter EBIT / Operating Income for the period.
- Enter Interest Expense for the same period.
- Select Calculate to see the ratio and its interpretation.
Related Calculations
See overall leverage exposure with the Debt Ratio Calculator, or check earnings before interest and other non-operating effects with the EBITDA Calculator.