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. Interest Coverage Ratio

    A ratio used to determine how easily a company can pay interest ...
  4. Cash Available For Debt Service ...

    A ratio that measures the amount of cash a company has on hand ...
  5. Earnings Before Interest, Taxes, ...

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

    1. The charge for the privilege of borrowing money, typically ...
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. Analyze Investments Quickly With Ratios
    Investing Basics

    Analyze Investments Quickly With Ratios

comments powered by Disqus
Hot Definitions
  1. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  2. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  3. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  4. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  5. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
  6. Over The Counter

    A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" ...
Trading Center