How this calculator works
The interest coverage ratio, also called times interest earned, divides operating earnings before interest and tax by the interest expense for the same period. It answers how many times over the company's operating profit could pay its interest. A ratio of 5 means EBIT is five times the interest bill. A ratio below 1 means operations did not cover interest and the company had to use reserves, asset sales or new borrowing. Because the numerator is before interest and tax, the measure compares the business with its financing rather than mixing in tax policy. This page also runs the reverse problems: the EBIT needed for a target ratio, or the interest a given EBIT can cover.
Formula
Interest coverage = EBIT / interest expense. Times interest earned uses the same formula. Rearranged, EBIT = target ratio x interest expense and interest expense = EBIT / target ratio.
Worked example
A company with EBIT of $500,000 and interest expense of $100,000 has an interest coverage ratio of 5.0. To reach a ratio of 8 at the same interest bill, EBIT would need to be $800,000. At EBIT of $500,000, a ratio of 8 allows interest of $62,500.
Advertisement
Frequently asked questions
Is times interest earned the same thing?
Yes. Times interest earned and interest coverage ratio are two names for EBIT divided by interest expense. Some analysts use EBITDA instead of EBIT, which gives a higher figure because depreciation and amortisation are added back.
What if EBIT is negative?
The ratio becomes negative, showing that operations lost money before interest. That is more informative than treating the case as an error, so the calculator reports the negative figure.
What ratio is safe?
There is no universal threshold. A ratio below 1.5 is generally considered thin, and lenders often set covenants around 2 to 3. Compare with the industry and with the company's own history.
Should I use interest paid or interest expense?
Interest expense from the income statement matches EBIT, which is also an accrual figure. Cash interest paid can differ because of accruals, capitalised interest and discounts.