Enter the EBIT value in the selected currency.
Enter the interest expenses value in the selected currency.
History:

Explanation

What is the Interest Coverage Ratio (ICR)?

The Interest Coverage Ratio (ICR) is a key financial metric that measures a company’s ability to meet its interest obligations from its earnings before interest and taxes (EBIT). A higher ICR indicates a greater ability to cover interest expenses, which is a positive sign for investors and creditors.

The formula to calculate the Interest Coverage Ratio is:

§§ \text{ICR} = \frac{\text{EBIT}}{\text{Interest Expenses}} §§

where:

  • § \text{ICR} § — Interest Coverage Ratio
  • § \text{EBIT} § — Earnings Before Interest and Taxes
  • § \text{Interest Expenses} § — Total interest expenses incurred by the company

How to use the Interest Coverage Ratio Calculator?

  1. Input EBIT: Enter the Earnings Before Interest and Taxes (EBIT) value in the selected currency.

    • Example: If a company has an EBIT of $10,000, input 10000.

  2. Input Interest Expenses: Enter the total interest expenses incurred by the company.

    • Example: If the interest expenses are $2,000, input 2000.

  3. Calculate: Click the “Calculate” button to compute the Interest Coverage Ratio.

  4. Results: The calculator will display the ICR, indicating how many times the company can cover its interest expenses with its earnings.

When to use the Interest Coverage Ratio Calculator?

  1. Financial Analysis: Investors and analysts can use the ICR to assess a company’s financial health and its ability to manage debt.

    • Example: Evaluating whether a company can sustain its debt levels.

  2. Credit Assessment: Lenders may use the ICR to determine the risk of lending to a company.

    • Example: A bank assessing a loan application may look for a minimum ICR to ensure repayment capability.

  3. Investment Decisions: Investors can compare the ICR of different companies within the same industry to make informed investment choices.

    • Example: Comparing the ICR of two competing firms to identify which is more financially stable.

  4. Corporate Finance: Companies can monitor their ICR to ensure they maintain a healthy balance between earnings and debt obligations.

    • Example: A company may set a target ICR to guide its borrowing strategy.

Practical examples

  • Example 1: A company has an EBIT of $50,000 and interest expenses of $10,000. The ICR would be calculated as follows:

    • §§ \text{ICR} = \frac{50000}{10000} = 5 §§
    • This means the company can cover its interest expenses 5 times with its earnings.

  • Example 2: If a company has an EBIT of $30,000 and interest expenses of $15,000, the ICR would be:

    • §§ \text{ICR} = \frac{30000}{15000} = 2 §§
    • This indicates that the company can cover its interest expenses 2 times.

Definitions of Terms Used

  • EBIT (Earnings Before Interest and Taxes): A measure of a firm’s profit that includes all incomes and expenses (except interest and income tax expenses).
  • Interest Expenses: The cost incurred by an entity for borrowed funds, typically expressed as a percentage of the principal amount.

Use the calculator above to input different values and see the Interest Coverage Ratio change dynamically. The results will help you make informed decisions based on the financial health of the company you are analyzing.