How to use the interest coverage calculator
Use figures for the same period, usually the last 12 months or the last fiscal year, in millions of dollars:
- Earnings measure. Choose EBIT (operating income) or EBITDA and enter it. Remove one-off charges and gains if you want a picture of a normal year.
- Depreciation and amortization, optional, from the cash flow statement. With it, the calculator shows both EBIT and EBITDA coverage.
- Interest expense from the income statement, before subtracting any interest income.
- Lease payments, optional, for fixed-charge coverage. Rent and lease costs are fixed commitments much like interest.
- Debt exposed to higher rates, optional: floating-rate loans plus fixed-rate debt that must be refinanced soon. It drives the rate-rise columns of the stress test.
The formulas
EBITDA coverage = EBITDA ÷ Interest expense
Fixed-charge coverage = (EBIT + Lease payments) ÷ (Interest + Lease payments)EBIT is earnings before interest and taxes, EBITDA adds back depreciation and amortization. The stress test uses EBIT × (1 − fall) ÷ (Interest + Debt × rate rise).
Adding lease payments to both the top and the bottom always pulls fixed-charge coverage closer to 1.0 than plain interest coverage, which is the point: a retailer with modest debt but large store leases can look safe on interest coverage alone.
A worked example
Company A has EBIT of $900M and pays $150M of interest. Interest coverage is 6.00×. Adding back $300M of depreciation and amortization, EBITDA coverage is 8.00×.
The company also pays $60M a year in leases. Counting them as fixed charges, fixed-charge coverage is 4.57×.
Interest takes 16.7% of operating income, so EBIT could fall 83.3% before earnings stopped covering the interest bill.
Stress-testing the ratio
A coverage ratio describes one year. The useful question is how it behaves when that year goes badly, and the table and chart under the calculator test two shocks at once: lower earnings and higher interest on the debt that reprices.
| Case | Coverage |
|---|---|
| The example | 6.00× |
| EBIT down 30% | 4.20× |
| Rates up 3 points on $3,000M of debt | 3.75× |
| EBIT down 50% and rates up 3 points | 1.88× |
| Twice the debt and interest | 3.00× |
Company A’s cover is comfortable today, and even the combined shock leaves it at 1.88×. A company with twice the borrowing starts at 3.00×; the same shock would take it to 0.94×, below the 1.0× line. Earnings fall fastest in businesses with high fixed costs, so pair this test with the operating leverage calculator to see how far a sales decline cuts EBIT.
How coverage fits with other credit measures
Coverage measures the burden of interest, not the amount of debt. A company can borrow heavily at low rates and still show high coverage, until the debt is refinanced at higher rates. That is why analysts read it next to debt-to-equity and debt to EBITDA, and check when the debt matures. Rating agencies often use interest coverage among their metrics, but the weight it gets and the levels they look for vary by industry and agency.
For property and project loans, lenders use the debt service coverage ratio instead, which also counts principal repayments.
What this calculator does not include
Interest coverage ignores principal repayments, capital spending and taxes, all of which compete with lenders for the same cash. Capitalized interest, which some companies add to the cost of assets under construction rather than expensing it, can make reported interest look lower than the real bill; add it back if it is material. The stress test applies the rate rise to the debt you enter at once, while in practice fixed-rate debt reprices only as it matures. Use cash flow measures as a cross-check, especially for companies with heavy investment needs.