# How to Calculate the EBITDA-to-Interest Coverage Ratio for Financial Stability

![EBITDA-to-Interest Coverage Ratio](https://www.investopedia.com/thmb/r-MTJhXZraoMlbMrm1sAJHKZQp4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/ebitdacoverinterestratio.asp_final-5079a4d909264af68db0ee832c9ca348.png)

*— Investopedia / NoNo Flores*

## What Is the EBITDA-to-Interest Coverage Ratio?

The EBITDA-to-interest coverage ratio is a financial metric that shows how easily a company can pay its interest using its pre-tax income. Unlike standard interest coverage, which uses [earnings before interest and taxes (EBIT)](https://www.investopedia.com/terms/e/ebit.asp), this ratio uses [earnings before interest, taxes, depreciation, and amortization (EBITDA)](https://www.investopedia.com/terms/e/ebitda.asp) to focus on cash earnings. A higher ratio indicates a stronger ability to meet interest payments. Leveraged buyout bankers used this ratio to check a company’s short-term debt-paying ability.

*   The EBITDA-to-interest coverage ratio assesses a company's ability to pay interest using pre-tax income.  
    
*   EBITDA coverage uses earnings before interest, taxes, depreciation, and amortization, making it more inclusive than standard interest coverage.  
    
*   A ratio greater than 1 signals a company can cover its interest expenses.  
    
*   The EBITDA-to-interest coverage ratio originated with leveraged buyout bankers to evaluate debt servicing ability.  
    
*   A higher coverage ratio is generally better, though ideal ratios vary across industries.

## The Formula For the EBITDA-to-Interest Coverage Ratio Is:

![Image](https://www.investopedia.com/thmb/VsaiOQMptTdvPtMvmhX7YU6clkU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_EBITDA_To_Interest_Coverage_Ratio_Dec_2020-012-3a127232967d435d93bda56dd6b7211f.jpg)

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## How to Interpret the EBITDA-to-Interest Coverage Ratio

Leveraged buyout bankers first widely used this ratio to quickly assess if a restructured company can meet its [short-term debt](https://www.investopedia.com/terms/s/shorttermdebt.asp).

While the ratio is a very easy way to assess whether a company can [cover its interest-related expenses](https://www.investopedia.com/ask/answers/121814/what-good-interest-coverage-ratio.asp), the applications of this ratio are also limited by the relevance of using EBITDA (earnings before interest, tax, depreciation, and amortization) 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 since the company might need to spend a large portion of its profits on replacing old equipment. Since EBITDA excludes depreciation expenses, a ratio of 1.25 may not reliably indicate financial strength.

## Calculating the EBITDA-to-Interest Coverage Ratio: A Step-by-Step Example

1\. **Gather the essential financial figures:** Identify the company's sales revenue, salary expenses, utility costs, lease payments, depreciation, and interest expenses.

2. **Calculate EBIT:** Subtract operating expenses and depreciation from sales revenue. Use the following formula: EBIT = Revenues - (Salary Expenses) + Utilities + Lease Payments) − Depreciation. For example: EBIT = $1,000,000 - ($250,000 + $20,000 + $100,000) - $50,000 or $580,000.  
  
3\. **Calculate EBITDA:** Add back depreciation and amortization to EBIT. Use the formula: EBITDA = EBIT + Depreciation. For example: EBITDA = $580,000 + $50,000 or $630,000.  
  
4\. **Compute the EBITDA-to-interest coverage ratio, including lease payments:** Use the formula: EBITDA-to-Interest Coverage Ratio = (EBITDA + Lease Payments} ÷ (Interest + Lease Payments). For example: EBITDA-to-interest coverage ratio = ($630,000 + $100,000) ÷ ($120,000 + $100,000) or 3.32.