Interest Coverage Ratio

Definition

Interest Coverage Ratio (ICR) is a financial ratio that tells how well a company is able to pay interest on outstanding debt. This metric is commonly used by investors, lenders, and creditors to understand the risk of lending capital to a business.

Example

Interest Coverage Ratio = EBITDA / Interest Expense. Suppose, Company A has an EBITDA of $100,000 and the total interest expense is $40,000.Interest Coverage Ratio = 100,000 / 40,000 = 2.5. An ICR in the range of 2.5-3 means that the company is in a good position to repay its debt from current earnings. A lower ratio indicates the company's inability to cater to its debt commitments from existing earnings.

Why it matters

ICR is an indicator of a company's ability to pay interest on outstanding debt. This metric is used by lenders, creditors, and investors to gauge the risk level of lending funds to the company. It also indicates the company's stability and short-term financial health.

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