To calculate the Interest Coverage Ratio:
\[ ICR = \frac{EBIT}{IE} \]
Where:
The Interest Coverage Ratio is a financial metric used to assess a company’s ability to meet its interest obligations on outstanding debt. It is calculated by dividing the company’s earnings before interest and taxes (EBIT) by its interest expenses. This ratio provides insight into a company’s ability to generate enough operating income to cover its interest payments. A higher ratio indicates that a company is in a stronger position to meet its interest payments, while a lower ratio suggests a higher risk of defaulting on debt obligations.
Let's assume the following values:
Using the formula:
\[ ICR = \frac{500,000}{100,000} = 5 \]
The Interest Coverage Ratio is 5, which means the company can cover its interest expenses 5 times with its earnings before interest and taxes.
