What is Interest Coverage Ratio?

The interest coverage ratio is a financial metric that assesses a company’s ability to meet its interest obligations on its outstanding debt. It provides insight into the company’s ability to generate enough operating income to cover its interest expenses.

To calculate the interest coverage ratio, you can use the following formula:

Interest Coverage Ratio = Earnings Before Interest and Taxes (EBIT) / Interest Expense

Where:

  • Earnings Before Interest and Taxes (EBIT): It represents a company’s operating income before deducting interest and taxes. It is sometimes referred to as operating profit.
  • Interest Expense: The amount of interest paid or payable by the company on its outstanding debt over a specific period.

For example, if a company has an EBIT of $500,000 and an interest expense of $100,000, the calculation would be as follows:

Interest Coverage Ratio = $500,000 / $100,000 = 5

In this case, the interest coverage ratio is 5, indicating that the company’s operating income is sufficient to cover its interest expense 5 times over.

The interest coverage ratio is an important indicator of a company’s ability to service its debt obligations. A higher ratio indicates a greater ability to cover interest expenses and suggests a lower risk of default. Conversely, a lower ratio suggests a higher risk of default as the company’s operating income may not be enough to meet its interest obligations.

OTHER TERMS BEGINNING WITH "I"

  • Illiquid Assets

    Illiquid assets refer to assets that are not easily converted into cash or traded in the market quickly without incurring significant losses in value. These assets typically have limited marketability and can take a considerable amount of time to convert…

  • Income or Profit & Loss Statement (P&L)

    An Income or Profit & Loss Statement (P&L) is a Financial Report that shows the total revenue and total expenses over a specific period of time, usually a month, fiscal quarter or an entire year. The profit shown on the…

  • Incoterms

    The Incoterms rules or International Commercial Terms are a series of pre-defined commercial terms published by the International Chamber of Commerce (ICC). They are widely used in International commercial transactions or procurement processes and the Incoterms rules have become an…

  • Indemnification

    Indemnification is typically an agreement in which one party agrees to protect or to hold harmless another party from financial loss or legal action.

  • Ineligibles

    Ineligibles are negotiable instruments or short terms assets that a company counts as an asset, but that a lender will not count as eligible collateral. Ineligible accounts might include accounts receivable that are more than 90 days past due, contra…

  • Insolvencies

    Insolvencies refer to situations in which individuals or businesses are unable to meet their financial obligations, such as repaying debts, because their liabilities (debts and other obligations) exceed their assets, or they are facing cash flow problems. Insolvency can lead…

  • Inspection Certificate

    An Inspection Certificate provides proof that goods being shipping is, in fact, what the customer ordered, and is also of good quality. Many times the inspection report is from an arms-length third party inspection service. A purchase order or vendor…

  • Intercreditor Agreement

    An Intercreditor Agreement is an agreement between one or more creditors who have shared interests in a particular borrower. The agreement spells out aspects of their relationship to each other and to the borrower so that, in the event a…

  • Inventory

    Inventory or Stock refers to the goods and materials that a business holds for the ultimate purpose of resale. It is a Current Asset on the Balance Sheet. Most manufacturing organizations usually divide their "goods for sale" inventory into: Raw…

  • Inventory Financing

    Inventory Financing is a type of asset based lending that is based on a company’s convertible or saleable inventory assets. To constantly ascertain what is easily convertible and quickly saleable inventory is labor intensive and why Inventory Financing is not…

  • Invoice

    An Invoice is a legal document listing a service delivered or merchandise shipped, the ship to name and address, the bill to name and address, the cost and terms of the sale. It is also important that the invoice reflects…

  • Invoice Factoring

    Invoice Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (invoices) to a third party (called a factor) at a discount. A business will sometimes factor its receivable assets to…

  • Invoice Financing

    Invoice Financing is a type of asset-based lending and there are two different types. The 1st type is when the business opens a line of credit leveraging their good accounts receivable as collateral. The 2nd is when the business sells its…

  • Invoice Verification Process

    You and your factor want the same thing that your customer is happy with your product or services. The invoice verification process ensures that your client is satisfied with your product or service and has the proper documentation in their…

  • IRS Tax Lien

    A federal tax lien is the legal claim of the government against your property because of nonpayment or neglect of tax debt. The IRS can levy, seize and sell any type of real or personal property that you own or…