Distinct from this site’s debt service coverage ratio (which divides income by total debt service, principal included) — this measures only whether operating earnings cover the interest bill itself.
How it works
EBIT (operating earnings before interest and taxes) divided by annual interest expense. A ratio of 5 means operating earnings could pay the interest bill five times over.
What this does not include
This doesn’t account for principal repayment due on the debt, only interest — a company can have strong interest coverage while still facing a cash crunch from principal payments coming due, which is exactly what debt service coverage ratio is built to catch instead.
How to use this calculator
- Enter EBIT (operating earnings) and annual interest expense.
A worked example
EBIT of $500,000 against $100,000 in interest expense: interest coverage ratio = 500,000 ÷ 100,000 = 5 — comfortably covering interest obligations.
EBIT of $50,000 against $100,000 interest expense: ratio = 0.5 — earnings don’t even cover the interest payment, a significant warning sign.
What the variables mean
| Variable | Meaning |
|---|---|
| EBIT | Earnings before interest and taxes |
| Interest expense | Total interest owed on debt for the period |
Edge cases worth knowing
A ratio below 1 means the business can’t cover its interest payments from operating earnings alone — a serious red flag for lenders and investors, distinct from simply having debt.
Zero interest expense makes the ratio undefined — there’s no interest obligation to compare earnings against, so the calculator returns no result.
Frequently asked questions
What’s considered a healthy interest coverage ratio?
Lenders commonly flag anything below 1.5 as thin coverage, and below 1.0 means operating earnings don’t even cover the interest bill — a real warning sign.
Can this ratio be negative?
Yes, if EBIT itself is negative (an operating loss) — reported plainly here rather than hidden, since it’s a real and important signal.
How is this different from debt-to-equity?
Debt-to-equity is a balance-sheet leverage ratio comparing total debt to equity; this is an earnings-based ratio comparing operating income to the interest cost of that debt.
