Mr. Kim is a Certified Public Accountant specializing in corporate finance and fixed-income valuation.
The **Interest Coverage Ratio (ICR) Calculator** assesses a company’s ability to handle its debt obligations by comparing its operating profit to its interest expenses. This versatile four-variable calculator solves for any missing input: **Earnings Before Interest & Taxes (EBIT)**, **Interest Expense (IE)**, the **ICR Ratio**, or **Earnings Before Tax (EBT)**. **Input any three of the four core financial variables** to find the missing one.
Interest Coverage Ratio Calculator
Interest Coverage Ratio Formulas
The core ICR ratio and its inverse relationships are essential for analyzing solvency and leverage:
Note: $V$ (ICR) is a pure ratio. Values for $F, P, Q$ are currency ($$).
Formula Source: Investopedia: Interest Coverage Ratio
Variables Explained
The Interest Coverage Ratio calculation involves:
- EBIT (F): Earnings Before Interest and Taxes ($), which represents operating profit.
- Interest Expense (IE, P): The total interest paid on debts for the period ($).
- ICR Ratio (V): The Interest Coverage Ratio (times).
- EBT (Q): Earnings Before Tax ($), calculated as EBIT minus IE.
Related Calculators
Assess your company’s debt and solvency with these related financial health tools:
- Degree of Financial Leverage Calculator
- Times Interest Earned Calculator
- Debt-to-Equity Ratio Calculator
- Fixed Charge Coverage Ratio Calculator
What is the Interest Coverage Ratio (ICR)?
The **Interest Coverage Ratio (ICR)** is a fundamental liquidity ratio used by creditors and investors to gauge a company’s ability to meet its interest obligations from its operating profits. It essentially tells you how many times a company’s earnings can cover its annual interest payments.
A high ICR (e.g., 3.0 or higher) indicates that the company can easily manage its debt load, making it a safer investment or lending target. A low ICR (e.g., below 1.5) signals financial strain, suggesting the company may struggle to make interest payments if earnings decline.
The use of EBIT is key because it represents the profit generated by core operations before financial decisions (interest) and government requirements (taxes) are applied, thus providing a clean view of operational debt-servicing capacity.
How to Calculate ICR (Example)
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Identify Components:
A company has $\mathbf{EBIT}$ of $\mathbf{\$200,000}$ and $\mathbf{IE}$ of $\mathbf{\$40,000}$.
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Apply the Formula:
$$ \text{ICR} = \frac{\text{EBIT}}{\text{IE}} = \frac{\$200,000}{\$40,000} $$
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Determine the ICR Ratio:
The result is $\mathbf{5.0}$. This means the company’s operating profits can cover its interest expenses five times over, indicating strong solvency.
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Calculate EBT (For Reference):
$$ \text{EBT} = \text{EBIT} – \text{IE} = \$200,000 – \$40,000 = \mathbf{\$160,000} $$ The earnings before tax are $\mathbf{\$160,000}$.
Frequently Asked Questions (FAQ)
A: Generally, analysts prefer an ICR above 2.0 to 3.0. For utilities or very stable industries, a lower number might be acceptable. For volatile industries, a higher number (e.g., 5.0+) provides a better safety margin.
A: An ICR of 1.0 means the company’s EBIT is exactly equal to its Interest Expense. The company generates just enough operating profit to cover its interest payments, leaving no buffer for unforeseen circumstances. This is considered very risky.
A: Creditors use ICR to assess the risk of default. A declining ICR signals increasing debt risk, which can lead to higher borrowing costs or refusal to extend new credit.
A: EBIT (Earnings Before Interest and Taxes) is operating profit. EBT (Earnings Before Tax) is profit after deducting interest expense but before deducting tax expense. $\text{EBT} = \text{EBIT} – \text{IE}$.