Ebitda-To-Interest Coverage Ratio

EBITDA-to-Interest Coverage Ratio: What it Is and How to Use It The EBITDA-to-interest coverage ratio measures a company's ability to meet interest payments from its operating cash earnings. It uses EBITDA (earnings before interest, taxes, depreciation, and amortization) instead of EBIT to focus on cash-generation potential rather than accounting profit. A higher ratio indicates greater capacity to service interest expense. Common formulas
* Basic: EBITDA ÷ Interest Expense
* With lease adjustment (used by some lenders): (EBITDA + Lease Payments) ÷ (Interest + Lease Payments)
A ratio above 1 means a company generates enough EBITDA to cover its interest obligations; higher values imply more cushion. Explore More Resources

Step-by-step example Assume:
- Revenues = $1,000,000
- Operating expenses (excluding depreciation and interest) = $370,000 (salaries $250,000 + utilities $20,000 + lease payments $100,000)
- Depreciation = $50,000
- Interest expense = $120,000
1. Calculate EBIT:
2. EBIT = Revenues − Operating expenses − Depreciation
3. EBIT = $1,000,000 − $370,000 − $50,000 = $580,000 Explore More Resources

  4. Calculate EBITDA:
  5. EBITDA = EBIT + Depreciation = $580,000 + $50,000 = $630,000 Explore More Resources




  6. Compute coverage ratios:
  7. Basic: EBITDA ÷ Interest = $630,000 ÷ $120,000 = 5.25 
  8. Including lease adjustment: (EBITDA + Lease) ÷ (Interest + Lease) = ($630,000 + $100,000) ÷ ($120,000 + $100,000) = 3.32

How to interpret the number
* > 1: EBITDA exceeds interest expense (company can cover interest from operating earnings). Explore More Resources

  * Larger ratios offer more cushion against earnings volatility. 
  * “Good” benchmarks vary by industry, business stability, and capital intensity; many lenders prefer coverage in the 2–3× range or higher for predictable businesses, while cyclical or capital-intensive firms may require greater coverage.

Limitations and caveats
* EBITDA excludes depreciation and amortization, so it can overstate available cash for companies with significant capital expenditure needs.
* EBITDA ignores taxes, principal repayments, and changes in working capital.
* Accounting choices and one-time items can distort EBITDA (adjusted EBITDA).
* Lease accounting standards and treatment can affect whether leases are added back.
* Relying solely on this ratio can mask liquidity issues; complement it with cash-flow and leverage metrics.
Complementary metrics to check
* EBIT (earnings before interest and taxes) ÷ Interest
* Free Cash Flow ÷ Interest or Free Cash Flow to Debt Service
* Debt-to-EBITDA (leverage)
* Current ratio or operating cash flow coverage
Practical tips
* Use trailing twelve months (TTM) figures for recent performance.
* Adjust for non-recurring items to get a normalized EBITDA.
* Compare against industry peers and historical company trends.
* For capital-intensive businesses, emphasize cash-flow measures and consider using EBIT for coverage analysis.
Key takeaways
* The EBITDA-to-interest coverage ratio helps assess a firm’s ability to service interest from operating earnings.
* It’s useful for quick screening but has material limitations—especially for companies with high capex or volatile earnings.
* Use it alongside other liquidity and leverage measures and apply conservative adjustments where appropriate.