Coverage: drag EBIT
Drag the bar to set EBIT. Interest is held still, so the headline coverage moves only because the numerator does. Halve EBIT and the multiple halves. That is a worse year, or a cyclical trough, not a new loan.
Interest coverage
8.0x
EBIT
$80,000,000
The bill is a fixed $10,000,000. Halve EBIT and the multiple halves. Illustrative arithmetic, not a covenant or advice.
Interest expense
$10,000,000, held still so only EBIT moves the multiple.
In short
- Drag the bar up for more EBIT and a higher multiple.
- Read coverage as a times figure, not a percent.
- Halve EBIT on the slider and watch the multiple halve with it.
- Focus the handle and use the arrow keys to step EBIT.
How many times the bill is earned
Interest coverage is EBIT over interest expense. Lenders ask whether operating profit covers the coupon. How interest coverage works is the identity, with the interest coverage calculator under the answer.
This is a flow on an income statement. The leverage ratios are stocks on a balance sheet. A firm can look modestly borrowed on the sheet and still fail coverage if EBIT has fallen.
The bill can move without new debt
Hold EBIT and raise interest, and coverage falls the same way. Floating-rate debt that rolls into a higher coupon does this without any new borrowing. The balance-sheet ratios may not have moved at all.
EBITDA sits one line above EBIT and will print a higher multiple for the same bill, which is why a lender who uses EBITDA is using a softer test.
Zero interest is not infinity
A firm with no interest expense does not have infinite coverage. It has nothing to cover. This picture keeps a positive interest line on purpose. Interest coverage is the one-sentence version of the multiple.
Common questions
Is 8 times a covenant?
No. It is EBIT over interest on the teaching sheet. Loan agreements write their own tests, often on EBITDA, often with add-backs this picture does not run.
Why does coverage fall when EBIT falls?
Because the bill is in the denominator and is held still here. Half the profit against the same coupon is half the multiple.
Is this a credit rating?
No. It is one division. It is educational material, not 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.