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).

Industry benchmark for ICR

There is our industry benchmarking calculated using US SEC data, where you can find average values for interest coverage ratio.

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Quote sajjad ahmed, 22 December, 2014
an income statement shows finance costs  which are further broken down in the notes section into interest payable, exchange loss charges etc. when calculating ICR should I consider only the interest payable OR should I consider finance costs shown in the income statement as the denominator?
Quote Vit. A., 22 December, 2014
Quote
sajjad ahmed wrote:
an income statement shows finance costs which are further broken down in the notes section into interest payable, exchange loss charges etc. when calculating ICR should I consider only the interest payable OR should I consider finance costs shown in the income statement as the denominator?
Use finance costs shown in the income statement.
Quote Guest, 17 February, 2015
Hi,
If a company does not have earning before interest tax and earning after tax then how to calculate can we calculate from another method
Quote Sija, 26 April, 2016
Do I include financial income in the interest expense?
Thank you
Quote Guest, 4 October, 2016
when working out the answer, do you include the negative sign before the interest expense value? for example: 57,000,000/-4,111,000 = -13.87
Also, what units is the answer in?
Quote Guest, 6 October, 2016
Sir I am making a proposal in which pbdit/ interest of firm  is 1.90 whereas the minimum benchmark is 2.00,what proper justification can be given for this,firm is arthia agent based in haryana
Quote Guest, 21 February, 2017
Why PBDIT is taken to calculate ISCR ?
Quote Guest, 13 April, 2017
what are the reasons for low interest cover?
Quote Guest, 24 May, 2017
what will be the interest coverage ratio to a company with no interest expenses.
Quote Guest, 31 July, 2017
Always had this curiosity- why don't we look at Ebidta and only Ebit for calculation of interest cover? Although, yes, for DSCR we always consider Ebidta. Tks!
Regards, Ash D.
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