EBITDA-To-Interest Coverage Ratio

AAA

DEFINITION of 'EBITDA-To-Interest 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:

EBITDA-To-Interest Coverage Ratio



Also known as EBITDA Coverage.

INVESTOPEDIA EXPLAINS 'EBITDA-To-Interest Coverage Ratio'

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.

RELATED TERMS
  1. Interest Expense

    The cost incurred by an entity for borrowed funds. Interest expense ...
  2. Net Income After Taxes - NIAT

    An accounting term, most often found in a company's annual report, ...
  3. Earnings Before Interest, Taxes, ...

    An indicator of a company's financial performance which is calculated ...
  4. Interest

    1. The charge for the privilege of borrowing money, typically ...
  5. Leveraged Buyout - LBO

    The acquisition of another company using a significant amount ...
  6. Proxy

    1. An agent legally authorized to act on behalf of another party. ...
Related Articles
  1. Mergers And Acquisitions: Understanding ...
    Fundamental Analysis

    Mergers And Acquisitions: Understanding ...

  2. A Clear Look At EBITDA
    Markets

    A Clear Look At EBITDA

  3. EBITDA: Challenging The Calculation
    Options & Futures

    EBITDA: Challenging The Calculation

  4. Is the Social Security trust fund solvent?
    Retirement

    Is the Social Security trust fund solvent?

comments powered by Disqus
Hot Definitions
  1. Halloween Massacre

    Canada's decision to tax all income trusts domiciled in Canada. In October 2006, Canada's minister of finance, Jim Flaherty, ...
  2. Zombies

    Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to ...
  3. Witching Hour

    The last hour of stock trading between 3pm (when the bond market closes) and 4pm EST. Witching hour is typically controlled ...
  4. October Effect

    The theory that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological ...
  5. Repurchase Agreement - Repo

    A form of short-term borrowing for dealers in government securities.
  6. Correlation

    In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used ...
Trading Center