# EBITDA-To-Interest Coverage Ratio

## What is the ‘EBITDA-To-Interest Coverage Ratio’

The EBITDA-to-interest coverage ratio is a ratio that is used to assess a company’s financial durability by examining whether it is at least profitably enough to pay off its interest expenses. A ratio greater than 1 indicates that the company has more than enough interest coverage to pay off its interest expenses. This ratio is also known as EBITDA coverage.
The ratio is calculated as follows:

## Explaining ‘EBITDA-To-Interest Coverage Ratio’

This ratio was first widely used by leveraged buyout bankers, who would use it as a first screen to determine whether a newly restructured company would be able to service its short-term debt obligations. While this ratio is a very easy way to assess whether a company can cover its interest-related expenses, the applications of this ratio are also limited by the relevance of using EBITDA as a proxy for various financial figures. For example, suppose that a company has an EBITDA-to-interest coverage ratio of 1.25; this may not mean that it would be able to cover its interest payments, because the company might need to spend a large portion of its profits on replacing old equipment. Because EBITDA does not account for depreciation-related expenses, a ratio of 1.25 might not be a definitive indicator of financial durability.

## EBITDA-To-Interest Coverage Ratio Calculation and Example

There are two formulas used for the EBITDA-to-interest coverage ratio that differ slightly. Analysts may differ in opinion on which one is more applicable to use depending on the company being analyzed. They are as follows: