Answer first
What this calculator tells you
Calculate how many times operating income covers interest expense. See how much a business's earnings could fall before it struggles to pay interest. Formula: Interest coverage = operating income (EBIT) ÷ interest expense. At the worked-example inputs, the interest coverage ratio is 4.00×. Holding every other input steady, moving operating income (EBIT) from $384,000 to $576,000 moves the result from 3.20× to 4.80×.
Transparent method
The formula
See how much a business's earnings could fall before it struggles to pay interest.
Worked example
Example inputs
How to interpret the result
Coverage asks a simple question: how many times over do operating earnings pay the interest bill? With $480,000 of operating income and $120,000 of interest, the answer is 4 times. Turn it around and it says earnings could fall by 75 percent before interest went unpaid. Lenders watch this number because a bad year hits it first, long before the principal is at risk.
At the worked-example inputs the interest coverage ratio is 4.00×. It rises with operating income (EBIT) and falls as interest expense increases.
These are planning metrics, not audited accounting or a valuation opinion.
Before you rely on it
What to check
Use the same year for both figures, and check whether the interest number includes capitalized interest or only the amount expensed.
The common error
Where people go wrong with interest coverage ratio calculator
Using net income instead of operating income. Interest has already been taken out of net income, so the ratio would count the same cost twice.
Sensitivity evidence
How operating income (EBIT) changes the interest coverage ratio
Holding every other input at the worked-example value, moving operating income (EBIT) from $384,000 to $576,000 moves the interest coverage ratio from 3.20× to 4.80×: a spread of 1.60×, or 40% of the worked-example result.
| Operating income (EBIT) | Interest coverage ratio | Fall in EBIT before interest is uncovered |
|---|---|---|
| $384,000 | 3.20× | 68.8% |
| $432,000 | 3.60× | 72.2% |
| $480,000worked example | 4.00× | 75.0% |
| $528,000 | 4.40× | 77.3% |
| $576,000 | 4.80× | 79.2% |
Every input, tested
Which input moves the interest coverage ratio most
Of the 2 inputs, interest expense moves the interest coverage ratio most (0.81× across the range tested) and operating income (EBIT) moves it least (0.80×).
| Input | Tested from | To | Interest coverage ratio at each end | Swing |
|---|---|---|---|---|
| Interest expense | $108,000 | $132,000 | 4.44× to 3.64× | 0.81× (20%) |
| Operating income (EBIT) | $432,000 | $528,000 | 3.60× to 4.40× | 0.80× (20%) |
Two variables at once
Interest coverage ratio by operating income (EBIT) and interest expense
Across the grid the interest coverage ratio runs from 2.67× to 6.00×. Moving operating income (EBIT) from $384,000 to $576,000 shifts it by 1.60× at the middle column, and moving interest expense from $96,000 to $144,000 shifts it by 1.67× at the middle row, so interest expense is the bigger lever here.
| Operating income (EBIT) \ Interest expense | $96,000 | $120,000 | $144,000 |
|---|---|---|---|
| $384,000 | 4.00× | 3.20× | 2.67× |
| $432,000 | 4.50× | 3.60× | 3.00× |
| $480,000 | 5.00× | 4.00× | 3.33× |
| $528,000 | 5.50× | 4.40× | 3.67× |
| $576,000 | 6.00× | 4.80× | 4.00× |
The highlighted cell is the worked example: 4.00×.
Step by step
The worked example, input by input
| Input | Value used | What it means |
|---|---|---|
| Operating income (EBIT) | $480,000 | Enter the operating income (EBIT) used in this calculation. |
| Interest expense | $120,000 | Enter the interest expense used in this calculation. |
| Interest coverage ratio | 4.00× | |
| Fall in EBIT before interest is uncovered | 75.0% | |
Inputs, definitions and assumptions
Operating income (EBIT)
Enter the operating income (EBIT) used in this calculation. The prefilled worked-example value is $480,000.
Interest expense
Enter the interest expense used in this calculation. The prefilled worked-example value is $120,000.
How to use this calculator
- 1Verify the inputs. Gather operating income (EBIT) and interest expense from your own documents; the prefilled values are examples.
- 2Save a baseline. The worked example puts the interest coverage ratio at 4.00×. Store your own version of it as Scenario A.
- 3Test one change. Start with interest expense, the input with the biggest effect here: moving interest expense from $108,000 to $132,000 takes the interest coverage ratio from 4.44× to 3.64×, a swing of 20% of the worked-example figure.
- 4Check the extremes. At half the example interest expense ($60,000) the interest coverage ratio is 8.00×; at double ($240,000) it is 2.00×.
People also ask
Frequently asked questions
How do you calculate interest coverage ratio?
Interest coverage = operating income (EBIT) ÷ interest expense. Enter operating income (EBIT) in dollars and interest expense in dollars. At the worked-example inputs the interest coverage ratio is 4.00×.
What does the interest coverage ratio result mean?
See how much a business's earnings could fall before it struggles to pay interest. At the worked-example inputs the interest coverage ratio is 4.00×. It rises with operating income (EBIT) and falls as interest expense increases.
How much does operating income (EBIT) change the interest coverage ratio?
Holding every other input at the worked-example value, moving operating income (EBIT) from $384,000 to $576,000 moves the interest coverage ratio from 3.20× to 4.80×, a spread of 1.60×.
What are the limits of this interest coverage ratio calculator?
These are planning metrics, not audited accounting or a valuation opinion. The tables on this page test operating income (EBIT) only from $384,000 to $576,000; a value outside that range is not tabulated here.
Which input moves the interest coverage ratio most in the interest coverage ratio calculator?
Ranked by how far each moves the interest coverage ratio across the range tested: interest expense (0.81×, 20%) and operating income (EBIT) (0.80×, 20%).
If I double interest expense in the interest coverage ratio calculator, does the interest coverage ratio double?
Doubling it from $120,000 to $240,000 takes the interest coverage ratio from 4.00× to 2.00×, which is 0.50 times the worked-example figure. So it falls instead of rising. Halving it to $60,000 gives 8.00×.
How much does interest expense matter in the interest coverage ratio calculator?
The worked example uses $120,000. Holding every other input at its worked-example value, moving interest expense from $108,000 to $132,000 takes the interest coverage ratio from 4.44× to 3.64×, a swing of 20% of the worked-example figure.
Which inputs change the fall in EBIT before interest is uncovered in the interest coverage ratio calculator?
At the worked-example inputs it is 75.0%. Operating income (EBIT) takes it from 72.2% to 77.3% and interest expense takes it from 77.5% to 72.5%.
How do I know if my prices are too low?
Compare each price with the full cost of a unit, including overhead and your own time. Steady sales with a thin or shrinking margin point to prices that are too low, and a small test increase shows how demand responds.
Sources and evidence
Free Calculators Online is independent and is not affiliated with or endorsed by the source organizations. Educational estimates only.