Interest coverage
A defined earnings measure, such as earnings before interest and taxes (EBIT) or earnings before interest, taxes, depreciation and amortization (EBITDA), divided by a defined interest expense measure for the same period. A covenant’s specified adjustments and interest basis govern its calculation.
Interest coverage in round numbers
Hypothetical annual amounts in US$ millions: EBIT of 5.81 and gross interest expense of 1.15 give 5.81 ÷ 1.15 = 5.05x coverage. EBITDA of 5.83 on the same basis gives 5.83 ÷ 1.15 = 5.07x. Assume the 0.02 difference consists only of depreciation and amortization. These earnings ratios are not cash-flow coverage measures.
Scroll horizontally to read all columns.
| Measure | Calculation | Coverage |
|---|---|---|
| EBIT basis | 5.81 ÷ 1.15 | 5.05x |
| EBITDA basis | 5.83 ÷ 1.15 | 5.07x |
Shayne Fitz-Coy’s definition of Interest coverage
Coverage is commonly defined one way and contracted another. The textbook approach runs EBIT over interest, leveraged finance runs EBITDA, and the credit agreement runs whatever it says it runs.
Read the covenant definition before computing anything. That is the ratio you are actually measured on.
Terms Related to Interest coverage
EBITDA · EBITDA add-backs · Debt/EBITDA multiple · Covenant · DSCR · All of the glossary