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Interest Coverage Ratio Formula:
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The Interest Coverage Ratio (ICR) measures a company's ability to pay interest on its outstanding debt. It indicates how many times a company can cover its interest expenses with its earnings before interest and taxes.
The calculator uses the Interest Coverage Ratio formula:
Where:
Explanation: The ratio shows how easily a company can pay interest on outstanding debt. A higher ratio indicates better financial health.
Details: The ICR is crucial for creditors and investors to assess a company's financial risk. It helps determine the company's ability to meet its interest obligations and indicates potential financial distress if the ratio is too low.
Tips: Enter EBIT and Interest Expense in dollars. Both values must be positive numbers. The calculator will compute the ratio showing how many times the company can cover its interest expenses.
Q1: What is a good Interest Coverage Ratio?
A: Generally, a ratio above 1.5 is considered acceptable, but higher ratios (2.5+) indicate stronger financial health. Ratios below 1 indicate the company cannot meet its interest obligations from operating earnings.
Q2: How does ICR differ from debt service coverage ratio?
A: ICR only considers interest expenses, while debt service coverage ratio includes both interest and principal repayments, providing a more comprehensive view of debt servicing ability.
Q3: Can ICR be negative?
A: Yes, if EBIT is negative, the ICR will be negative, indicating the company is losing money and cannot cover its interest expenses from operations.
Q4: How often should ICR be calculated?
A: ICR should be calculated regularly, typically quarterly or annually, to monitor changes in the company's ability to service its debt.
Q5: What industries have different ICR standards?
A: Capital-intensive industries like utilities and manufacturing may have lower acceptable ICRs due to higher debt levels, while service industries typically maintain higher ratios.