With the help of the interest coverage calculator, it is very easy to calculate the interest coverage ratio or times interest earned. You just need to find out three figures, i.e., EBIT, Interest Expenses, and Taxes, from the income statement of an entity. It is one of the important financial ratios, especially useful for lenders, debenture holders, financial institutions, etc. Looking from the interest of lenders, they are interested in evaluating the ability of an entity to pay fixed interest.
We would ask – What is the source of making payment of interest? PROFITS or CASH? The formula we use for our calculator is quite different from most websites and books. We have kept CASH into consideration rather than PROFITS, and that is why we have used the following formula.
The following formula is used to calculate the interest coverage ratio.
| PBIT + Non-Cash Expenses – Taxes | ||
| Interest Service Coverage Ratio (ISCR) | = | ————————- |
| Interest |
The numerator of the formula has three components
- PBIT is absolutely basic.
- Non-cash Expenses are added to PBIT when approach is relatively less conservative.
- Tax deducted from above because they are also confirmed payments.
Interest Coverage Calculator
How to Calculate using a Calculator?
We just need to plug in the following figures in the calculator.
PBIT – It can easily be calculated from the income statement. The full form of PBIT is profit before interest and taxes.
Non- Cash Expenses – Non-cash expenses mean expenses present in the income statement but not paid in cash. For example, depreciation, amortization, provisions, etc., are deducted from the income statement but are not paid in cash.
Interest Expense – Interest expense can be easily found out from the face of the income statement.
Taxes – The total tax on net profits that the entity is going to pay.
1.93. It means that the entity has 2.07 times of cash available to pay for the interest expense in the period.
I believe there should be 1.93 times cash rather than 2.07 times cash . Thank you
Thanks Raja for pointing out the error. It was a typographical error. 2.07 is correct but the mistake was in carrying the tax amount of 24000/-.
Thanks again for suggesting improvement. We look forward for it.
Hello Sanjay,
You may have corrected it already but the calculations in this piece are incorrect. The actual calculation resulting in 1.93 would be correct if the tax amount used was 24,000, not the 16,000 amount shown in the equation.
Additionally, in the Interpretation paragraph, the inverse of the above error is described thus resulting in a separate error on it’s own.
As you know, for every equation, there is only one correct answer. 1.93 can not be interpreted as 2.07.
Thanks for all the great material you produce. I’ve been following eFinanceManagement for about a year and while I don’t fully review everything or see everything…..This is the first time I’ve noticed any errors. So, No Worries Kind Sir.
Kind Regards,
Greg Stecher
Thanks for your feedback Gregory,
We have already updated the errors in the posts. You may be seeing a cached version of the post.