Interest coverage calculator
Interest coverage is EBIT over interest expense. On $80,000,000 of EBIT and $10,000,000 of interest, coverage is 8 times. The operations earned the interest bill eight times over.
Interest coverage
8.0x
$80,000,000 of EBIT over $10,000,000 of interest.
- EBIT
- $80,000,000
- Interest expense
- $10,000,000
- Times interest earned
- 8.00x
Figures on this page are in millions of dollars. Operating profit before interest and tax.
The formula
EBIT is operating profit before interest and tax. Interest is the period's interest expense. The ratio is a multiple: 8, not 8 percent. A zero interest line is not a coverage ratio.
How many times the bill is earned
Lenders ask whether operating profit covers the interest. Divide EBIT by interest expense and the answer is a multiple. On $80,000,000 of EBIT against $10,000,000 of interest, coverage is 8 times.
Eight times is a comfortable teaching-sheet reading. It is not a covenant. Loan agreements write their own tests, often on EBITDA rather than EBIT, and often with add-backs this page does not run.
This is a cousin of the leverage ratio family: those ratios are stocks on a balance sheet. Coverage is a flow on an income statement. A firm can look modestly borrowed on the sheet and still fail coverage if EBIT has fallen.
Double the interest, hold EBIT
Keep EBIT at $80,000,000 and raise interest to $20,000,000. Coverage falls to 4 times. Profit did not fall. The bill did.
That is the rate-reset case in one line. Floating-rate debt that rolls into a higher coupon does this without any new borrowing. The leverage ratios on the balance sheet may not have moved at all.
Half the EBIT, same bill
EBIT is now $40,000,000, interest still $10,000,000. Coverage is 4 times, matching the second sheet by a different route. The first cut the denominator. This one cut the numerator.
A cyclical firm at the bottom of its cycle prints the ugly coverage reading just when it would most like to borrow. That is why coverage is tested in a downturn in a credit memo, not only on last year's peak EBIT. EBITDA sits one line above EBIT and will print a higher multiple for the same interest bill, which is why a lender who uses EBITDA is using a softer test.
What this page is not doing
It is not a covenant engine, not EBITDA coverage, and not a rating model. It will not print Infinity when interest is zero: a firm with no interest expense does not have infinite coverage, it has nothing to cover.
It is also not a recommendation about how much coverage a firm should keep. Eight times on the teaching sheet is $80,000,000 over $10,000,000. For how much of the sheet is borrowed, use the leverage ratio page. This is educational material, not financial advice.
Worked examples
\$80,000,000 of EBIT over \$10,000,000 of interest
EBIT is $80,000,000. Interest expense is $10,000,000. What is interest coverage?
- Coverage is EBIT over interest: .
- The operations earned the interest bill 8 times.
Interest coverage is 8 times.
The same EBIT against \$20,000,000 of interest
Keep EBIT at $80,000,000. Raise interest to $20,000,000. What is coverage?
- Coverage: .
- EBIT is still $80,000,000. The interest bill doubled to $20,000,000, so the multiple halved.
Coverage falls to 4 times. EBIT did not move. The interest bill doubled.
\$40,000,000 of EBIT, same \$10,000,000 bill
EBIT is $40,000,000. Interest is $10,000,000. What is coverage?
- Coverage: .
- Interest is still $10,000,000. EBIT halved, so the multiple halved.
Coverage is 4 times, matching the second sheet from the EBIT side.
The mistake that costs the most
Using EBITDA in a formula labelled EBIT, or printing Infinity when interest is zero.
EBITDA is larger than EBIT by depreciation and amortisation, so the same interest bill prints a higher multiple. A covenant written on EBIT is failed by a sheet that only looks fine on EBITDA.
A firm with no interest expense has nothing to cover. Calling that infinite coverage treats a missing bill as a perfect score.
Common questions
EBIT or EBITDA?
This page uses EBIT. Some covenants use EBITDA, which is a softer test because depreciation is added back. Type the operating-profit figure the test in front of you actually names.
What if interest is zero?
There is no coverage ratio to take. This calculator will not print Infinity. A firm with no interest expense is not infinitely safe. It simply has no interest bill on this sheet.
Is 8 times a good figure?
It is $80,000,000 over $10,000,000 on the teaching sheet. Loan agreements write their own tests. This is educational material, not financial advice.
Keep reading
This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.