# Interest Coverage Calculator

With the help of interest coverage calculator, it is very easy to calculate interest coverage ratio or times interest earned. You just need to find out 3 figures i.e. EBIT, Interest Expense and Taxes from the income statement of an entity.

## Interest Coverage Ratio

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 are using 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 following formula.

## Formula for Calculating Interest Coverage

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 3 components

1. PBIT, absolutely basic.
2. Non-cash Expenses, added to PBIT when approach is relatively less conservative.
3. Tax deducted from above because they are also confirmed payments.

## About the Calculator / Features

This calculator instantly calculates the interest coverage ratio for an entity for a particular period, when the user enters information such as PBIT, Non-cash Expenses, Interest Expense for the period, and Taxes.

## 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 means expenses present in the income statement but not paid in cash. For example, depreciation, amortization, provisions etc are deducted from income statement but are not paid in cash.

### Interest Expense

Interest expense can be easily found out from the face of income statement.

### Taxes

The total tax on net profits that the entity is going to pay.

## Example of Interest Coverage

Assume an entity having following figures

EBIT of 1,20,000

Interest expense of 60,000

Depreciation and Amortization of 20,000

Taxes of 24000

Therefore, the interest coverage ratio, we will calculate as follows:

Interest coverage ratio = [120000 + 20000 – 24000] / 60000 = 1.93

## Interpretation of Interest Coverage

With the calculator, even a layman can calculate the interest service coverage. But, interpreting the result is the next challenge. For example, in the above illustration, we see that the ICR is 1.93. It means that the entity has 1.93 times of cash available to pay for the interest expense in the period.

Normally, higher the ratio, higher would be the ability of the entity to serve the interest payments.

## Cautions

We should also note that the decisions about lending will not only depend on this ratio. There are hosts of other factors also. For a detailed interpretations of the ratio, we suggest reading Interest Service Coverage Ratio (ISCR)

Share Knowledge if you liked Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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### 4 thoughts on “Interest Coverage Calculator”

1. 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.

2. 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

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