EBITDATOINTEREST COVERAGE RATIO

A ratio that is used to assess a company's financial durability by examining whether it is at least profitably enough to pay off its interest expenses. A ratio greater than 1 indicates that the company has more than enough interest coverage to pay off its interest expenses.

The ratio is calculated as follows:



Also known as EBITDA Coverage.

This ratio was first widely used by leveraged buyout bankers, who would use it as a first screen to determine whether a newly restructured company would be able to service its short-term debt obligations.

While this ratio is a very easy way to assess whether a company can cover its interest-related expenses, the applications of this ratio are also limited by the relevance of using EBITDA 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, because the company might need to spend a large portion of its profits on replacing old equipment. Because EBITDA does not account for depreciation-related expenses, a ratio of 1.25 might not be a definitive indicator of financial durability.