Interest Coverage Ratio

The Interest Coverage Ratio (ICR) is a financial ratio used to measure a company's ability to pay the interest on their outstanding debt. It is calculated by dividing a company's earnings before interest and taxes (EBIT) by its interest expenses for a given period.

For example, a company has an EBIT of $100,000 and interest expenses of $20,000. The company's Interest Coverage Ratio would be 5, meaning the company is earning five times more than its interest expenses.

The formula for ICR is: ICR = EBIT / Interest Expenses.

A higher ICR is usually considered better, since it means the company is able to more easily pay its interest expenses. Companies with ICRs below 1 may struggle to pay their debt, while a company with an ICR of 2 or more is generally considered to have a healthy financial position.