Interest Coverage Calculator
From EBIT and interest expense, compute the interest coverage (times interest earned) to gauge debt-paying ability.
Input Data
Results
At a glance:The interest coverage (EBIT ÷ interest expense), also called times interest earned, measures how many times operating profit covers borrowing interest — a core solvency indicator. Higher is safer (2.5–3+ sound); below 1.5 thin; below 1 a serious warning. This tool uses the standard EBIT basis; some analysis uses EBITDA as numerator for a cash-closer view.
Formula
Interest coverage = EBIT ÷ interest expense.
$$\text{Interest Coverage} = \dfrac{\text{EBIT}}{\text{Interest Expense}}$$How to Use
- Enter EBIT from the income statement.
- Enter the period's total interest expense.
- View the interest coverage (how many times profit covers interest).
With interest expense fixed at HK$60,000, coverage as EBIT rises
| EBIT (HK$) | Interest (HK$) | Coverage | Safety read |
|---|---|---|---|
| 60,000 | 60,000 | 1.0× | Danger: profit just covers interest |
| 150,000 | 60,000 | 2.5× | Reasonably sound |
| 300,000 | 60,000 | 5.0× | Safe: ample buffer |
Case Studies
Case 1: Reading the coverage
A company reports EBIT HK$300,000 and interest HK$60,000.
Coverage = 300,000 ÷ 60,000 = 5×, ample buffer even if earnings fall.
Case 2: EBIT vs EBITDA basis
An asset-heavy firm has EBIT 150,000, interest 60,000, standard coverage 2.5×, but yearly depreciation/amortisation of 90,000.
Using EBITDA (150,000 + 90,000 = 240,000) as numerator, coverage rises to 4×. For asset-heavy firms the EBITDA basis better reflects cash available for interest. Clarify the basis when comparing peers.
FAQ
How high is a safe interest coverage?
Generally higher is safer: 2.5–3+ is sound; 1.5–2.5 moderately tight; below 1.5 thin buffer; below 1 a serious warning. The real safety line depends on earnings stability and industry — cyclical firms need a higher buffer.
Why EBIT rather than net profit?
Because the ratio assesses the ability to pay interest, the earnings should logically be before interest — that is EBIT. Net profit is already after interest is deducted, so using it as the numerator is logically backwards. Some use EBITDA (adding back non-cash D&A) for a cash-closer view.
How does it differ from the debt-to-equity ratio?
Debt-to-equity (liabilities ÷ equity) is a balance-sheet leverage-structure indicator; interest coverage (EBIT ÷ interest) is an income-statement ability indicator. View both for a full picture: leverage scale plus interest-paying ability.
Related Tools
References
Content review: Calculatorism Science Team. Results are for reference only; please refer to the relevant authorities for the official figures.