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.
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.