Interest coverage ratio (ICR), also referred to as times interest earned ratio, is a financial ratio that measures the ability of a company to meet its interest payments on outstanding debts. It is a commonly used metric by lenders, creditors, and investors to assess the riskiness of lending capital to a business.

The formula for calculating the interest coverage ratio is as follows:

Interest Coverage Ratio = Earnings Before Interest and Taxes (EBIT) / Interest Expense

To interpret the ICR, a low ratio (ICR < 1) could indicate a higher risk associated with the company because its operating profit might be insufficient to cover the interest payments and therefore a higher chance of bankruptcy. A high ICR could mean that a company is overlooking opportunities to increase profitability through leverage. Generally speaking, an ICR above 2 or 3 is optimal for a company.

Reviews Add a review
No reviews yet

More From Corporate Finance Institute®

Browse our top rated business templates. See All
Financial Institution Dividend Discount Model
The financial institution dividend discount model uses future dividends to find the implied share price. This model is based on…
Loan Payment Calculator
The loan payment calculator allows users to determine the principal and interest payment each month until the full balance of…
DDM - Excel Dividend Discount Model Template
The dividend discount model template allows investors to value a company base on future dividend payments. This is based on…
Non-directional trading strategy template Non-directional Trading Strategies Template
The non-directional trading strategies template allow users to determine the profit when buying options. This template focuses on non-directional strategies…
restructuring financial model template preview 1 Restructuring Financial Model Template
This restructuring financial model template is used to demonstrate the financial interactions behind the restructuring process. Adjust this model to…
TMT Financial Model Template Preview TMT Financial Model Template
This TMT financial model template is used to value technology, media, and telecom firms. This model provides a template to…