Interest Coverage Calculator
Calculate interest coverage from covenant EBITDA and cash interest. Optionally enter a minimum coverage threshold to see headroom and the EBITDA decline to that threshold.
Inputs
Coverage is N/M because no cash interest expense has been entered (or it is zero). Interest coverage requires positive cash interest.
Methodology
- Interest coverage ratio
- Covenant EBITDA ÷ cash interest expense, expressed as a multiple (e.g. 2.35x).
- Headroom
- Actual coverage − minimum threshold. Positive means coverage is above the minimum.
- EBITDA decline to threshold
- The percentage fall in covenant EBITDA that would bring coverage to the entered minimum, assuming cash interest is unchanged. Uses "reaching" a threshold, not legal breach.
- N/M
- Shown when EBITDA or cash interest is zero/negative.
Worked example
- Covenant EBITDA: £1,000,000
- Cash interest: £400,000
- Interest coverage = 2.50x
- Minimum coverage 2.00x → breach EBITDA = £800,000 → decline ≈ 20.0%
Interpretation & limitations
Higher coverage means more cushion above a minimum-coverage covenant. The "EBITDA decline to threshold" assumes cash interest stays constant as EBITDA falls, which may not hold if interest is itself linked to debt levels or rates. Definitions of EBITDA and cash interest vary between agreements — refer to your finance documents.
Related tools
Your financial data stays on your device. Calculations run entirely in your browser. Nothing is uploaded or saved.
Understanding interest coverage
Interest coverage measures the relationship between earnings and interest expense, helping indicate how comfortably a business can service its interest obligations from the earnings measure used in the calculation. A higher ratio generally indicates greater coverage, while a lower ratio indicates less cushion.
Where a finance agreement includes a minimum interest coverage covenant, the calculated ratio can be compared with that threshold to assess covenant headroom. As EBITDA declines towards the minimum required coverage ratio, that headroom reduces.
What affects interest coverage?
Interest coverage can deteriorate because EBITDA falls, interest expense rises, or both. Higher borrowing, increased interest rates or weaker operating performance can therefore reduce the amount of coverage available.
The precise calculation depends on the definitions contained in the relevant finance agreement. Covenant EBITDA may include permitted adjustments, while the interest measure used for covenant testing may differ from accounting interest expense shown in the financial statements.