Interest Coverage Ratio is a type of

**Solvency Ratio that determines a company’s capacity to pay its Interests.**It is a measure of the profitability of a company relative to the interest payable.__Interest Coverage Ratio is also known as Times-Interest Earned Ratio.__Interest Coverage Ratio = EBIT / Interest Expense

**Where,****EBIT is Earnings Before Interest and Taxes**or the Gross earning of a company- And
**Interest Expense**implies**Total Interest Payable by a Company.**

## Significance and Interpretation

**Interest Coverage Ratio = 1:**This implies that the gross profit of the company is just equal to the interest payable, this is an alarming situation for the company.**Interest Coverage Ratio < 1:**This implies that the gross profit of the company is not even enough to pay the interest dues, such companies are on the verge of getting insolvent.**Interest Coverage Ratio> 1:**This implies that the company’s gross profit is more than its interest payable, this seems to be good, but it is not enough for the company to grow and survive.- The
**ideal Interest Coverage Ratio is > 3,**below which it is not considered to be safe. However, for some industries, the Interest Coverage Ratio of 2-3 may be acceptable.__It must be noted that this limit may shift depending upon the regulatory reforms and/or type of business.__

### Examples

**Example 1: Earnings before Interest and taxes (EBIT) for M/S XYZ Ltd. is ₹5050 Crores, total debt is ₹4500 Crores on which interest is applicable at the rate of 10%. Calculate the Interest Coverage Ratio for M/S XYZ Ltd.****Solution:**EBIT = ₹5050 Crores- Total Interest = 10% of ₹4500 Crores = ₹450 Crores
- Interest Coverage Ratio = EBIT / Total Interest = 5050/450 = 101/9
**Hence, Interest Coverage Ratio = 101/9 = 11.22**

**Example 2: Profit after taxes for M/S ABC Ltd is ₹560 Crores, the rate of tax is 30% for companies. Total debt for the company is ₹750 Crores on which interest is applicable at a rate of 12%. Calculate the Interest Coverage Ratio for M/S ABC Ltd.****Solution:**- Let Earnings/Profit before taxes be
**x,**then as given: - x- 30% of x = Profit After Taxes
- Therefore, 7x/10 = 560
- Hence, x = 800. Hence Earning Before Taxes= ₹800 Crores
**Total Interest = 12% of 750 Crores = ₹90 Crores****Earnings Before Interest + Taxes = Earnings Before Taxes + Interest = 800 + 90 = ₹890 Crores**- Interest Coverage Ratio = EBIT / Total Interest = 890/90 = 89/9
**Hence, Interest Coverage Ratio = 89/9 or 9.89**