Interest Coverage Ratio = $8,580,000 / $3,000,000 = 2.86xĬompany A can pay its interest payments 2.86 times with its operating profit. The income statement of Company A is provided below: The interest expense for the period is $3,000,000. In addition, operating expenses in the most recent reporting period were $120,000 in salaries, $500,000 in rent, $200,000 in utilities, and $100,000 in depreciation. Interest expense represents the interest payable on any borrowings such as bonds, loans, lines of credit, etc.Īnother variation of the formula is using earnings before interest, taxes, depreciation and amortization (EBITDA) as the numerator: Interest Coverage Ratio = EBITDA / Interest Expense Interest Coverage Ratio Exampleįor example, Company A reported total revenues of $10,000,000 with COGS (costs of goods sold) of $500,000.EBIT is the company’s operating profit (Earnings Before Interest and Taxes).The interest coverage ratio formula is calculated as follows: The interest coverage ratio is also called the “times interest earned” ratio. The ICR is commonly used by lenders, creditors, and investors to determine the riskiness of lending capital to a company. The Interest Coverage Ratio (ICR) is a financial ratio that is used to determine how well a company can pay the interest on its outstanding debts. Updated MaWhat is Interest Coverage Ratio (ICR)?
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