Interest Cover Formula

Interest Cover Formula

Interest cover ratio is calculated to know the company ability to pay interest. Interest cover ratio is calculated by following equation. Interest cover is expressed in term No of times. In other word it explains how much profit is available to pay interest.

Interest Cover =    Profit before Interest & Tax

                                      Interest

Example

Mr. Ali khan reported a Profit of $ 800,000 & interest is payable on debenture amount 10 million @ 4%. How much profit is available to pay interest?

Solution

Interest Cover =    Profit before Interest & Tax

                                        Interest

= $ 800,000/$ 400,000

=2 times