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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:


Further Reading


Costs of financial distress and interest coverage ratios
onlinelibrary.wiley.com [PDF]
… COSTS OF FINANCIAL DISTRESS AND INTEREST COVERAGE RATIOS … When the current coverage ratio falls below the required minimum, the creditors can call the loan, and if the … There are three economic restrictions on this function, the first two of which do not apply when α …

Ebitda/Ebit and cash flow based ICRs: a comparative approach in the agro-food system in ItalyEbitda/Ebit and cash flow based ICRs: a comparative approach in the agro-food system in Italy
journals.muni.cz [PDF]
… COSTS OF FINANCIAL DISTRESS AND INTEREST COVERAGE RATIOS … When the current coverage ratio falls below the required minimum, the creditors can call the loan, and if the … There are three economic restrictions on this function, the first two of which do not apply when α …

Corporate financial distress: The case of publicly listed firms in an emerging market economyCorporate financial distress: The case of publicly listed firms in an emerging market economy
onlinelibrary.wiley.com [PDF]
… COSTS OF FINANCIAL DISTRESS AND INTEREST COVERAGE RATIOS … When the current coverage ratio falls below the required minimum, the creditors can call the loan, and if the … There are three economic restrictions on this function, the first two of which do not apply when α …

The Finances of China's Enterprise SectorThe Finances of China's Enterprise Sector
books.google.com [PDF]
… COSTS OF FINANCIAL DISTRESS AND INTEREST COVERAGE RATIOS … When the current coverage ratio falls below the required minimum, the creditors can call the loan, and if the … There are three economic restrictions on this function, the first two of which do not apply when α …

Zombie firms in Italy: a critical assessmentZombie firms in Italy: a critical assessment
papers.ssrn.com [PDF]
… COSTS OF FINANCIAL DISTRESS AND INTEREST COVERAGE RATIOS … When the current coverage ratio falls below the required minimum, the creditors can call the loan, and if the … There are three economic restrictions on this function, the first two of which do not apply when α …

How costly is financial (not economic) distress? Evidence from highly leveraged transactions that became distressedHow costly is financial (not economic) distress? Evidence from highly leveraged transactions that became distressed
onlinelibrary.wiley.com [PDF]
… COSTS OF FINANCIAL DISTRESS AND INTEREST COVERAGE RATIOS … When the current coverage ratio falls below the required minimum, the creditors can call the loan, and if the … There are three economic restrictions on this function, the first two of which do not apply when α …

Financial and income approach analysis in micro (MEs) and small/medium sized enterprises (SMEs): A comparative approach in fruit and vegetables processing …Financial and income approach analysis in micro (MEs) and small/medium sized enterprises (SMEs): A comparative approach in fruit and vegetables processing …
academicjournals.org [PDF]
… COSTS OF FINANCIAL DISTRESS AND INTEREST COVERAGE RATIOS … When the current coverage ratio falls below the required minimum, the creditors can call the loan, and if the … There are three economic restrictions on this function, the first two of which do not apply when α …


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