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)||=||————————-|
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.