Interest Coverage Ratio (ICR)

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Definition

The interest coverage ratio (ICR) is a measure of a company's ability to meet its interest payments. Interest coverage ratio is equal to earnings before interest and taxes (EBIT) for a time period, often one year, divided by interest expenses for the same time period. The interest coverage ratio is a measure of the number of times a company could make the interest payments on its debt with its EBIT. It determines how easily a company can pay interest expenses on outstanding debt.

Interest coverage ratio is also known as interest coverage, debt service ratio or debt service coverage ratio.

Calculation (formula)

The interest coverage ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) by the company's interest expenses for the same period.

Interest coverage ratio = EBIT / Interest expenses

Norms and Limits

The lower the interest coverage ratio, the higher the company's debt burden and the greater the possibility of bankruptcy or default. A lower ICR means less earnings are available to meet interest payments and that the business is more vulnerable to increases in interest rates. When a company's interest coverage ratio is only 1.5 or lower, its ability to meet interest expenses may be questionable. An interest coverage ratio below 1.0 indicates the business is having difficulties generating the cash necessary to pay its interest obligations (i.e. interest payments exceed its earnings (EBIT)).

A higher ratio indicates a better financial health as it means that the company is more capable to meeting its interest obligations from operating earnings. On the other hand, a high ICR may suggest a company is "too safe" and is neglecting opportunities to magnify earnings through leverage.

Exact formula in the ReadyRatios analytic software

Interest coverage ratio = EBIT / F2[FinanceCosts]

F2 – Statement of comprehensive income (IFRS).

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Quote Guest, 27 June, 2013
Hi, I'd like to know how can we calculate ICR wen we hve a negative EBIT

Many thanks in advance
Quote Guest, 5 October, 2013
its is simple that when you on loss than there is no interest coverage ratio as becuase generally this ratio define how company has capbaility to serve the interest on his outstanding liabilities on the basis of their income however when income is in negative it means company will not be able to serve the interest on their liabilities as well as not able to repay.
Quote AR, 12 February, 2014
Just to clarify, negative income means the company will depend on existing cash reserves to pay interest, not that the " company will not be able to serve the interest on their liabilities as well as not able to repay"
Quote Guest, 22 March, 2014
Could anyone please tell me what Profit before tax divided by Earnings before interest and taxes suggests? What is the Ratio? and how can it be interpreted please?

Also,

Profit after tax divided by Profit before tax?

Help would be much appreciated. :)
Quote Guest, 13 April, 2014
Hi, what about when a company does not have any finance costs. Say they have finance income of 9,000 and no finance cost. How would we then calculate net finance costs?
Quote SUJAY KUMAR, 3 July, 2014
how to calc EBIT when EBIDTA is given? PLEASE COMMENT FAST
Quote John Smith, 3 July, 2014
Quote
how to calc EBIT when EBIDTA is given?
EBIT = EBIDTA - Depreciation&Amortization
(i.e. EBIT<EBIDTA)
Quote Guest, 12 October, 2014
How to interprete a Interest cover when the interest payable is 0?
Quote Guest 2.0, 16 October, 2014
^
Yeah what do you do you do when interest payable is 0?
Quote Guest, 13 December, 2014
how can i find Interest expenses in annual report?
is it equal to finance cost
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