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Interest Coverage Ratio Calculator - Glossary:
Using our interest coverage ratio calculator, helps to compare, measure, understand the overall health of the business.
Interest Coverage Ratio:
Shows the proportion of Earnings Before Interest & Tax (EBIT) and Interest Expense.
In simple words, measures a company's ability to make interest payments on its debt in a timely manner.
How to calculate?
Interest Coverage Ratio = Earnings Before Interest and Tax (EBIT)/Interest Expense
This is an income statement component; the values are commonly stated against EBIT and Interest Expense.
Earnings Before Interest & Tax (EBIT):
Profit before deducting all its interest & taxes.
Interest expense is the cost of debt - the amount paid for servicing the amount borrowed by the company.
Interest coverage ratio for a company with an earnings before interest and tax (EBIT) of $100,000 and interest expense of $25,000 is 4 times. It can meet its interest payments 4 times of its earnings.
Interest coverage ratio lower than 1.5 times means a company is vulnerable and may face difficulties to meet its interest payments.
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