Interest Coverage Ratio Calculator
The Interest Coverage Ratio (or Times Interest Earned - TIE) measures how many times a company can pay its annual debt interest expenses from its Operating Income (EBIT). It is the premier indicator of debt service comfort.
Sensitivity Analysis
Evaluate how variations in key operational drivers impact Interest Coverage (Times).
| Sensitivity Case | Assumption Shift | Driver Value | Interest Coverage (Times) | Impact vs Base |
|---|
Formula & Methodology
Interest Coverage Ratio = Operating Income (EBIT) / Interest ExpenseEBITEarnings Before Interest and Taxes.
Interest ExpenseTotal contractual interest due on short and long-term borrowings.
Practical Worked Example
A manufacturing corporation reports EBIT of Rs 50,00,000 and total annual interest expense of Rs 10,00,000 on its bank facilities.
Interpretation & Industry Benchmarks
Times Interest Earned (TIE) tests the firm’s operating earnings buffer against contractual debt service payments.
Standard investment-grade threshold.
Prone to distress during economic slowdowns.
Earnings barely cover interest; restructuring risk.
Industry Nuance: Capital-intensive utilities can operate safely at 2.0x–2.5x due to highly stable cash flows, whereas cyclical tech firms require 5.0x+ cushions.
Analytical Limitations
- Ignores mandatory principal amortization (see DSCR for full debt service evaluation).
Frequently Asked Questions
What is a good Interest Coverage Ratio?
A ratio above 3.0x is widely accepted as healthy. Lenders typically look for at least 2.5x to 3.0x for commercial loan covenants.
Can Interest Coverage Ratio be negative?
Yes, if operating income (EBIT) is negative, coverage will be negative, signaling severe operating losses.