What Is the EBITDA-to-Interest Coverage Ratio?

The EBITDA-to-interest coverage ratio is a financial ratio that is used to assess a company's financial durability by examining whether it is at least profitable enough to pay off its interest expenses using its pre-tax income. Specifically it looks to see what proportion of earnings before intere𓃲st,ꦓ taxes, depreciation, and amortization (EBITDA), can be used for this purpose.

The EBITDA-to-interest coverage ratio is also known simply as as EBITDA coverage. The main difference between EBITDA coverage and the 澳洲幸运5官方开奖结果体彩网:interest coverage ratio, is that the latter uses 澳洲幸运5官方开奖结果体彩网:earnings before interest and taxes (EBIT), rather than the more encompassiꦺng EBITDA.

The Formula For the EBITDA-to-Interest Co♚verage Ratio Is:

🍃Understanding the EBITDA-to-Interest Coverag♛e Ratio

The EBITDA-to-interest coverage ratio was first widely used by 澳洲幸运5官方开奖结果体彩网:leveraged buyout bankers, who would use it as a first screen to determine whether a newly restructured company would be able to service its 澳洲幸运5官方开奖结果体彩网:short-term debt obligations. A ratio greater than 1 indiꦓcates that the company has more than enough interest coverageꦗ to pay off its interest expenses.

While the ratio is a very easy way to assess whether a company can 澳洲幸运5官方开奖结果体彩网:cover its in⛄terest-related expenses, the applications of this ratio are also limited by the relevance of using EBITDA (earnings before interest, tax, depreciation, and amortization) 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 since the company might need to spend a large portion of its profits on replacing old equipment. Because EBITDA does not account for deprec𝓡iation-related expenses, a ratio of 1.25 might not be a definitive indicator of financial durability.

EBI📖TDA⛎-To-Interest Coverage Ratio Calculation and Example

There are two formulas used for the EBITDA-to-interest coverage ratio that differ sli🍷ghtly. Analysts may differ in opinion✅ on which one is more applicable to use depending on the company being analyzed. They are as follows:

EBITDA-to-interest coverage = (EBITDA + lease payments) / (loan interest payments + lease payments)

and

Interest coverage ratio, which is EBIT / interest expenses.

As an example, consider the following. A company reports sales revenue of $1,000,000. Salary expenses are reported as $250,000, while utilities are reported as $20,000. Lease payments are $100,000. The company also reports 澳洲幸运5官方开奖结果体彩网:depreciation of $50,000 and 澳洲幸运5官方开奖结果体彩网:interest expenses of $120,000. To calculate the EBITDA-to-interest coverage ratio, first an analyst needs to calculate the EBITDA. EBITDA is calculated by taking the company's EBIT (earnings before interest and tax) and adding back the depreciation and amor💜tization amoun♔ts.

In the above example, the company's EBIT and EBITDA are calculated as:

• EBIT = revenues - operating expenses - depreciation = $1,000,000 - ($250,000 + $20,000 + $100,000) - $50,000 = $580,000
• EBITDA = EBIT + depreciation + amortization = $580,000 + $50,000 + $0 = $630,000

Next, using the formula for EBITDA-to-interest coverage that includes the lease payments term, the company's EBITDA-to-interest coverage ratio is:

• EBITDA-to-interest coverage = ($630,000 + $100,000) / ($120,000 + $100,000)
• = $730,000 / $220,000
• = 3.32