Interest Coverage Ratio formula
\[ \dfrac{\text{EBIT}}{\text{Interest expense}} \]
Terms
- EBIT, period total: Earnings before interest and taxes: operating profit plus other income and expenses such as investment income and currency results. It is the profit available to pay lenders, the state and owners.
- Interest expense, period total: Interest charged on financial debt for the period.
Result
Interest Coverage Ratio is a ratio. Higher is better.
Target
Rule of thumb: at least 1.5.
Below 1.5, a dip in earnings can make interest payments hard to meet; lenders often set a minimum in loan covenants.
Interest Coverage Ratio pitfalls
- In the Business Central evaluation company, Interest Expenses (67200) is filed under the Fees Expense category, and Interest Income under Interest Expense. A measure built on the standard categories then divides by interest income. Check the category assignment first.
Interest Coverage Ratio in Business Central
Cost of sales (period total)
- Category Cost of Goods Sold (26) and every category below it
- Plus 3 accounts assigned directly: 50310 Project Costs, 50320 Project Cost Applied, 50410 Purchase Variance, Retail
10 posting accounts in total.
The full account list is on the Cost of sales page.
Interest expense (period total)
- Category Interest Expense (34) and every category below it
1 posting account in total.
The full account list is on the Interest expense page.
Operating expenses (period total)
- Category Expense (31) and every category below it
- Plus 3 accounts assigned directly: 60410 Utilities Expense - Power Plant, 66200 Depreciation, Equipment, 67400 Miscellaneous
- Except category Interest Expense, account 91000 Currency Losses
102 posting accounts in total.
The full account list is on the Operating expenses page.
Other income and expenses, net (period total)
- Category Income, Interest (24) and every category below it
- Plus 6 accounts assigned directly: 40310 Income from securities, 40320 Management Fee Revenue, 40380 Currency Gains, 40390 Other Incidental Revenue, 81200 Gains and Losses, 91000 Currency Losses
7 posting accounts in total.
The full account list is on the Other income and expenses, net page.
Revenue (period total)
- Category Income, Services (19) and every category below it
- Category Income, Product Sales (20) and every category below it
- Category Income, Jobs (21) and every category below it
- Category Sales Discounts (22) and every category below it
- Category Sales Returns & Allowances (23) and every category below it
- Category Job Sales Contra (25) and every category below it
- Plus 8 accounts assigned directly: 40410 Job Sales, 40420 Job Sales Applied, 40430 Sales of Service Contracts, 40440 Sales of Service Work, 40910 Discounts and Allowances, 40920 Invoice Rounding, 40930 Payment Tolerance, 40940 Sales Returns
13 posting accounts in total.
The full account list is on the Revenue page.
Add Interest Coverage Ratio to a Power BI report
I build Power BI finance reports on Business Central data, with Interest Coverage Ratio, its trend and, where it helps, a forecast with a likely range. See it on your data