Interest Coverage Ratio Calculator: EBIT vs Interest

Is an interest coverage ratio of 4.00 healthy?

On the defaults — $480,000.00 of EBIT and $120,000.00 of interest expense — the interest coverage ratio is 4.00, the EBIT needed at the 3.00 target is $0.00, and the most interest expense the 3.00 target allows is $160,000.00. The interest coverage ratio — EBIT divided by interest expense — tells a lender whether a business earns enough to pay its interest, before tax, before principal, before anything else. EBIT is earnings before interest and taxes: revenue minus operating expenses, with interest and tax added back. A ratio of 1.00 means earnings exactly cover interest and nothing is left; below 1.00 the business must dip into cash or reserves to pay its lenders. Lenders generally look for 3.00 or higher; 1.50–3.00 is acceptable for many established businesses; below 1.50 often triggers a closer look or a loan covenant. A very high ratio can also mean the business is under-leveraged — it is not using cheap debt to grow. The interest coverage ratio differs from the debt-service coverage ratio: DSCR counts principal repayments too, so it is always the stricter test.

Four things about the model are worth stating plainly. First, the interest coverage ratio is the EBIT divided by the interest expense — $480,000.00 ÷ $120,000.00 = 4.00. Second, the EBIT needed at the target is the target times the interest expense minus the EBIT — 3.00 × $120,000.00 − $480,000.00 = $0.00, because EBIT is already $120,000.00 above the $360,000.00 needed. Third, the most interest expense allowed at the target is the EBIT divided by the target — $480,000.00 ÷ 3.00 = $160,000.00. And fourth, earnings cover interest four times over — the ratio is the earnings test, not the liquidity test; all listed in Accuracy & limitations.

The worked example, line by line

Setup: $480,000.00 of EBIT, $120,000.00 of interest expense, target ratio 3.00.

Line 1 — the interest coverage ratio. The interest coverage ratio is $480,000.00 ÷ $120,000.00 = 4.00.

Line 2 — the EBIT needed. The EBIT needed at the 3.00 target is 3.00 × $120,000.00 − $480,000.00 = $0.00 — EBIT is already $120,000.00 above the $360,000.00 needed.

Line 3 — the most interest expense allowed. The most interest expense the 3.00 target allows is $480,000.00 ÷ 3.00 = $160,000.00.

Line 4 — the headroom. EBIT exceeds 3.00 × $120,000.00 = $360,000.00 by $120,000.00 — the business could lose $120,000.00 of earnings and still hit the target.

Line 5 — the check. 4.00 × $120,000.00 = $480,000.00, the EBIT; and $360,000.00 + $120,000.00 = $480,000.00, the EBIT.

Every branch, checked

Interest expense $160,000: Interest coverage ratio 3.00; EBIT needed at the 3.00 target $0.00; most interest expense allowed at the 3.00 target $160,000.00 — With interest expense of $160,000.00 the EBIT covers the interest exactly three times over — the ratio is exactly 3.00, the target, and the EBIT needed at the 3.00 target is $0.00.

EBIT $360,000: Interest coverage ratio 3.00; EBIT needed at the 3.00 target $0.00; most interest expense allowed at the 3.00 target $120,000.00 — With EBIT of $360,000.00 the ratio is exactly 3.00 — the smallest EBIT that reaches the target; one dollar less and the ratio falls below it.

Interest expense $240,000: Interest coverage ratio 2.00; EBIT needed at the 3.00 target $240,000.00; most interest expense allowed at the 3.00 target $160,000.00 — With interest expense of $240,000.00 the ratio falls to 2.00 — inside the 1.50–3.00 acceptable band, but below the 3.00 lenders look for.

EBIT $600,000: Interest coverage ratio 5.00; EBIT needed at the 3.00 target $0.00; most interest expense allowed at the 3.00 target $200,000.00 — With EBIT of $600,000.00 the ratio is 5.00 — earnings cover interest five times over, and the most interest expense a 3.00 ratio allows rises to $200,000.00.

Interest expense $96,000: Interest coverage ratio 5.00; EBIT needed at the 3.00 target $0.00; most interest expense allowed at the 3.00 target $160,000.00 — With interest expense of $96,000.00 the ratio is 5.00 — the same ratio as $600,000.00 of EBIT, because the ratio is the EBIT divided by the interest.

EBIT $240,000: Interest coverage ratio 2.00; EBIT needed at the 3.00 target $120,000.00; most interest expense allowed at the 3.00 target $80,000.00 — With EBIT of $240,000.00 the ratio is 2.00 — inside the acceptable band, and the EBIT needed at the 3.00 target is $120,000.00.

Interest expense $480,000: Interest coverage ratio 1.00; EBIT needed at the 3.00 target $960,000.00; most interest expense allowed at the 3.00 target $160,000.00 — With interest expense of $480,000.00 the ratio is 1.00 — earnings barely cover interest, with nothing left for tax, principal or anything else.

The reverses, worked backwards

Smallest whole-dollar EBIT for the ratio to reach 3.00: At the displayed $360,000 the figures are Interest coverage ratio 3.00; EBIT needed at the 3.00 target $0.00; most interest expense allowed at the 3.00 target $120,000.00. At the displayed $360,000 the interest coverage ratio is 3.00. At $359,999 the EBIT is $1 short of the $360,000 needed — and the unrounded ratio is 2.999991 approximately, which displays as 3.00 after rounding, so $360,000 is the smallest whole-dollar EBIT for the ratio to reach 3.00.

Smallest whole-dollar EBIT for the ratio to reach 2.50: At the displayed $300,000 the figures are Interest coverage ratio 2.50; EBIT needed at the 2.50 target $0.00; most interest expense allowed at the 2.50 target $120,000.00. At the displayed $300,000 the interest coverage ratio is 2.50. At $299,999 the EBIT is $1 short of the $300,000 needed — and the unrounded ratio is 2.499991 approximately, which displays as 2.50 after rounding, so $300,000 is the smallest whole-dollar EBIT for the ratio to reach 2.50.

Largest whole-dollar interest expense for the ratio to STAY at or above 3.00: At the displayed $160,000 the figures are Interest coverage ratio 3.00; EBIT needed at the 3.00 target $0.00; most interest expense allowed at the 3.00 target $160,000.00. At the displayed $160,000 the interest coverage ratio is 3.00. At $160,001 the interest expense is $1 over the $160,000 allowed — and the unrounded ratio is 2.999981 approximately, which displays as 3.00 after rounding, so $160,000 is the largest whole-dollar interest expense for the ratio to stay at or above 3.00.

Largest whole-dollar interest expense for the ratio to STAY at or above 2.00: At the displayed $240,000 the figures are Interest coverage ratio 2.00; EBIT needed at the 2.00 target $0.00; most interest expense allowed at the 2.00 target $240,000.00. At the displayed $240,000 the interest coverage ratio is 2.00. At $240,001 the interest expense is $1 over the $240,000 allowed — and the unrounded ratio is 1.999991 approximately, which displays as 2.00 after rounding, so $240,000 is the largest whole-dollar interest expense for the ratio to stay at or above 2.00.

Smallest whole-dollar EBIT for the ratio to reach 5.00: At the displayed $600,000 the figures are Interest coverage ratio 5.00; EBIT needed at the 5.00 target $0.00; most interest expense allowed at the 5.00 target $120,000.00. At the displayed $600,000 the interest coverage ratio is 5.00. At $599,999 the EBIT is $1 short of the $600,000 needed — and the unrounded ratio is 4.999991 approximately, which displays as 5.00 after rounding, so $600,000 is the smallest whole-dollar EBIT for the ratio to reach 5.00.

Smallest whole-dollar EBIT for the ratio to reach 1.50: At the displayed $180,000 the figures are Interest coverage ratio 1.50; EBIT needed at the 1.50 target $0.00; most interest expense allowed at the 1.50 target $120,000.00. At the displayed $180,000 the interest coverage ratio is 1.50. At $179,999 the EBIT is $1 short of the $180,000 needed — and the unrounded ratio is 1.499991 approximately, which displays as 1.50 after rounding, so $180,000 is the smallest whole-dollar EBIT for the ratio to reach 1.50.

A warning about the neighbours: every neighbour above shows as the target when rounded to two decimals, but its unrounded ratio is short of the target. A lender underwriting on the unrounded ratio would still say no. The page prints the unrounded neighbour value in full so the rounding does not mislead you.

What the defaults assume

The defaults are $480,000.00 of EBIT, $120,000.00 of interest expense and a target ratio of 3.00 — Interest coverage ratio 4.00; EBIT needed at the 3.00 target $0.00; most interest expense allowed at the 3.00 target $160,000.00. With Interest expense $160,000, Interest coverage ratio 3.00; EBIT needed at the 3.00 target $0.00; most interest expense allowed at the 3.00 target $160,000.00. With EBIT $360,000, Interest coverage ratio 3.00; EBIT needed at the 3.00 target $0.00; most interest expense allowed at the 3.00 target $120,000.00. With Interest expense $240,000, Interest coverage ratio 2.00; EBIT needed at the 3.00 target $240,000.00; most interest expense allowed at the 3.00 target $160,000.00. With EBIT $600,000, Interest coverage ratio 5.00; EBIT needed at the 3.00 target $0.00; most interest expense allowed at the 3.00 target $200,000.00. With Interest expense $96,000, Interest coverage ratio 5.00; EBIT needed at the 3.00 target $0.00; most interest expense allowed at the 3.00 target $160,000.00. With EBIT $240,000, Interest coverage ratio 2.00; EBIT needed at the 3.00 target $120,000.00; most interest expense allowed at the 3.00 target $80,000.00. With Interest expense $480,000, Interest coverage ratio 1.00; EBIT needed at the 3.00 target $960,000.00; most interest expense allowed at the 3.00 target $160,000.00. With Interest expense $0, Interest coverage ratio — (undefined: no interest expense to cover); EBIT needed at the 3.00 target $0.00; most interest expense allowed at the 3.00 target $160,000.00. With EBIT $0, Interest coverage ratio 0.00; EBIT needed at the 3.00 target $360,000.00; most interest expense allowed at the 3.00 target $0.00. With EBIT $123,456, interest expense $98,765, Interest coverage ratio 1.25; EBIT needed at the 3.00 target $172,839.00; most interest expense allowed at the 3.00 target $41,152.00. With EBIT $1,000,000, Interest coverage ratio 8.33; EBIT needed at the 3.00 target $0.00; most interest expense allowed at the 3.00 target $333,333.33. With EBIT $62,500, interest expense $25,000, Interest coverage ratio 2.50; EBIT needed at the 3.00 target $12,500.00; most interest expense allowed at the 3.00 target $20,833.33. With Interest expense $1,000,000, Interest coverage ratio 0.48; EBIT needed at the 3.00 target $2,520,000.00; most interest expense allowed at the 3.00 target $160,000.00. With Target bars — EBIT $480,000, interest expense $120,000, EBIT needed at the 2.00 target $0.00; at the 3.00 target $0.00; most interest expense allowed at the 2.00 target $240,000.00; at the 3.00 target $160,000.00.

A note on the rounding: with EBIT of $123,456 and interest expense of $98,765 the unrounded ratio is 1.249997, which rounds half-up to 1.25 — the page prints the unrounded value so the rounding does not mislead you.

Output · formula · meaning

Who uses this

• The small-business owner applying for a loan: they learn $480,000.00 of EBIT over $120,000.00 of interest expense is a ratio of 4.00 — and they check the $360,000 reverse to see the smallest EBIT that reaches 3.00.
• The lender underwriting a credit line: they learn 3.00 or higher is what lenders generally look for — and they check the $160,000 reverse to see the largest interest expense that stays at or above 3.00.
• The owner whose ratio slipped to 2.00: they learn the business is inside the 1.50–3.00 acceptable band but below the 3.00 lenders want — and they check the $300,000 reverse to see the EBIT that reaches 2.50.
• The founder with a 5.00 ratio: they learn the business may be under-leveraged — and they check the $240,000 reverse to see the largest interest expense that stays at or above 2.00.

Accuracy & limitations

The math is first-principles: the interest coverage ratio is the EBIT divided by the interest expense, rounded to two decimals half-up; the EBIT needed at the target is the target times the interest expense minus the EBIT, floored at zero; the most interest expense allowed at the target is the EBIT divided by the target. The reverses are judged on the UNROUNDED ratio: a neighbour one dollar short shows as the target when rounded to two decimals, but its unrounded ratio is below the target, so it does not meet the bar — the page prints the unrounded neighbour value in full. What the model cannot do is judge the business: EBIT is earnings before interest and taxes — revenue minus operating expenses, with interest and tax added back — and a lender will check how much of the earnings is cash and how stable it is; the 3.00 line is the usual line, not a rule, and some industries run happily below it; and the ratio says nothing about the principal repayments, the cash flow, or whether the business is profitable. Use it to see whether the earnings cover the interest — then read the rest of the balance sheet.

Frequently asked questions