Interest Coverage Ratio
Definition: Interest Coverage Ratio is a solvency ratio expressing the degree to which a company can easily pay interest on its outstanding debt.
The ICR for a period can be calculated by the following formulas:
- EBIT / Interest Payments
- EBITDA / Interest Payments
The result of the ICR should normally be over 2 or so. A result lower than 1 indicates that the company is having trouble to generate enough cash to pay it's interest expenses on its debt, and that it is vulnerable to increases in interest rates.
Also called: Times Interest Earned.
Another solvency ratio is the Debt to Equity Ratio.
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