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.
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 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.
Formula for Calculating Interest Coverage
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.
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 expenses for the period, and Taxes.
Also Read: Interest Service Coverage Ratio
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.
Example of Interest Coverage
Assume an entity having the 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, the higher the ratio, the 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 interpretation of the ratio, we suggest reading Interest Service Coverage Ratio (ISCR)
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.