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.
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)||=||————————-|
The numerator of the formula has 3 components
- PBIT, absolutely basic.
- Non-cash Expenses, added to PBIT when approach is relatively less conservative.
- 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.
It can easily be calculated from the income statement. The full form of PBIT is profit before interest and taxes.
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 can be easily found out from the face of income statement.
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.
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)