If you are looking for some special tricks to use the interest coverage ratio formula in Excel, youâ€™ve come to the right place. There are numerous ways to use the interest coverage ratio formula in Microsoft Excel. This article will discuss two methods to use the interest coverage ratio formula in Excel. Letâ€™s follow the complete guide to learn all of this.

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## What Is Interest Coverage Ratio?

The interest coverage ratio measuresÂ an entityâ€™s ability, so that,Â interest payments on its debts can be made when they come due. An increasing ratio indicatesÂ a companyâ€™s ability to meet its interest expense obligations comfortably. In determining the companyâ€™s liquidity, lenders, such as banks and investors, use this ratio.

## Types of Interest Coverage Ratio

There are two types of interest coverage ratios. The first type is obtained by dividing EBIT by Interest Expenses. And the second type is obtained by dividing EBITDA by Interest Expenses. The Formulas are given below:

- Interest Coverage Expense= (EBIT)/Interest Expense
- Interest Coverage Expense= (EBITDA)/ Interest Expense

Here, **EBIT** means Earnings before interest and tax. And **EBITDA** means earnings before interest, tax, depreciation, and amortization.

## Significance of Interest Coverage Ratio

- An interest coverage ratio of 1 indicates that the company is in a risky condition. Financial institutions will never lend to these types of companies since they are in a poor financial situation.
- When a company pays interest on its debt, the interest coverage ratio must be greater than 1. If the interest coverage ratio is between 1 and 1.5, the company is in red alert condition.

## Simple Example of Interest Coverage Ratio

Here, we are going to show the simple calculation of interest coverage. The following image shows a companyâ€™s net operating profit, interest income, and interest expense for 2020.

In order to use the interest coverage ratio formula of the company, we need to add net profiting income with interest income. Then divided it by interest expense. For the above data, we have to do the following calculation:

**Interest Coverage Ratio=($20000+$4000)/$6000**

As a result, we will get an interest coverage ratio of 4. This value means the above companyâ€™s profits are able to cover the interest 4 times.

## 2 Suitable Ways to Use Interest Coverage Ratio Formula in Excel

We will use two effective and tricky methods to use the interest coverage ratio formula in Excel. This section provides extensive details on the two methods. You should learn and apply all of these, as they improve your thinking capability and Excel knowledge.

### 1. Using EBITDA Method

Here, we will demonstrate how to calculate the interest coverage ratio in Excel. Let us first introduce you to our Excel dataset so that you are able to understand what we are trying to accomplish with this article. The dataset provides details of the expenses and income of a company over the last four years. Our goal now is to calculate the companyâ€™s interest coverage ratio over the last four years. Letâ€™s walk through the steps to calculate the interest coverage ratio.

**đź“Ś Steps:**

- Firstly, enter the amount of money of the company in the
**Revenue**,**Operating Expenses**,**Interest Income**, and**Interest ExpenseÂ**section.

- Next, we want to calculate the total sales revenue of the company. Therefore, we will use the following formula in the cell
**C8:**

`=C6+C7`

Here, cell **C6** is the income of the company by the completion of the project. Cell **C7** is the companyâ€™s other income.

- Press
**Enter**.

- Next, drag the
**Fill Handle**icon to the right. - Therefore, you will obtain the companyâ€™s total sales revenue over the last four years.

- Next, we want to calculate gross profit . Therefore, we will use the following formula in the cell
**C12:**

`=C10-C11`

Here, cell **C10 **is the amount of the companyâ€™s total sales revenue. Cell **C11** is the direct cost of the company.

- Press
**Enter**.

- Next, drag the
**Fill Handle**icon to the right. - Therefore, you will obtain the companyâ€™s gross profit over the last four years.

- Next, we want to calculate the total operating expenses of the company. Therefore, we will use the following formula in the cell
**C17:**

`=C14+C15+C16`

- Press
**Enter**.

- Next, drag the
**Fill Handle**icon to the right. - Therefore, you will obtain the companyâ€™s total operating expenses over the last four years.

- Next, we want to calculate the net operating profit of the company. Therefore,Â we will use the following formula in the cell
**C21:**

`=C19-C20`

Here, cell **C19 **is the amount of the companyâ€™s gross profit. Cell **C20** is the total operating expenses of the company.

- PressÂ
**Enter.**

- Next, drag the
**Fill Handle**icon to the right. - Therefore, you will obtain the companyâ€™s net operating profit over the last four years

- Next, we want to calculate the
**EBITDA**of the company. Therefore, we will use the following formula in the cell**C23:**

`=C21+C22`

Here, cell **C21 **is the amount of the companyâ€™s net operating profit. Cell **C22** is the interest income of the company.

- Press
**Enter**.

- Next, drag the
**Fill Handle**icon to the right. - Therefore, you will obtain the companyâ€™s
**EBITDA**over the last four years

- Next, we want to calculate theÂ
**Interest Coverage Ratio**of the company. Therefore, we will use the following formula in the cell**C25**:

`=C23/C24`

Here, cell **C23 **is the amount of the companyâ€™s **EBITDA.** Cell **C24** is the interest expense of the company.

- Press
**Enter**.

- Next, drag the
**Fill Handle**icon to the right. - Therefore, you will obtain the companyâ€™s interest coverage ratio over the last four years

we will get an interest coverage ratio of 4.40Â which means the above companyâ€™s profits are able to cover the interest 4.4 times. From the above calculation, we see that the interest coverage ratio increases every year. This is a good sign for the company. That means the company is in stable condition.

**Read More: ****How to Do Ratio Analysis in Excel Sheet Format (with Quick Steps)**

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### 2. Utilizing EBIT Method

Here, we will use another method to calculate the interest coverage ratio of the company. In this method, the interest coverage ratio is obtained by dividing **EBIT** by Interest Expenses. Letâ€™s walk through the steps to calculate the interest coverage ratio.

**đź“Ś Steps:**

- Firstly, enter the amount of money of the company in the
**Revenue**,**Operating Expenses**,**interest income**, and**interest expense**section.

- Next, we will use the following formula in the cell
**C8**:

`=C6+C7`

Here, cell **C6** is the income of the company by the completion of the project. Cell **C7** is the companyâ€™s other income.

- Press
**Enter**.

- Next, drag the
**Fill Handle**icon to the right. - Therefore, you will obtain the companyâ€™s total sales revenue over the last four years.

- Next, we will use the following formula in the cell
**C12**:

`=C10-C11`

Here, cell **C10 **is the amount of the companyâ€™s total sales revenue. Cell **C11** is the direct cost of the company.

- Then, press
**Enter**.

- Next, drag the
**Fill Handle**icon to the right. - Therefore, you will obtain the companyâ€™s gross profit over the last four years.

- Next, we want to calculate the total operating expenses of the company. Therefore, we will use the following formula in the cell
**C17:**

`=C14+C15+C16`

- Then, press
**Enter**

- Next, drag the
**Fill Handle**icon to the right. - Therefore, you will obtain the companyâ€™s total operating expenses over the last four years.

- Next, we want to calculate the net operating profit of the company. Therefore, we will use the following formula in the cell
**C21**:

`=C19-C20`

Here, cell **C19 **is the amount of the companyâ€™s gross profit. Cell **C20** is the total operating expenses of the company.

- Then, press
**Enter**.

- Next, drag the
**Fill Handle**icon to the right. - Therefore, you will obtain the companyâ€™s net operating profit over the last four years

- Next, we want to calculate the
**EBITDA**Â of the company. Therefore, we will use the following formula in the cell**C23:**

`=C21+C22`

Here, cell **C21 **is the amount of the companyâ€™s net operating profit. Cell **C22** is the interest income of the company.

- Then, press
**Enter**.

- Next, drag the
**Fill Handle**icon to the right. - Therefore, you will obtain the companyâ€™s
**EBITDA**over the last four years

- Next, we want to calculate the EBIT of the company. Therefore, we will use the following formula in the cell
**C27:**

`=C25-C26`

Here, cell **C25 **is the amount of the companyâ€™s **EBITDA.** Cell **C26** is the depreciation of the company.

- Then, press
**Enter**.

- Next, drag the
**Fill Handle**icon to the right. - Therefore, you will obtain the companyâ€™s
**EBIT**over the last four years

- Next, we want to calculate the
**Interest Coverage Ratio**of the company. Therefore, we will use the following formula in the cell**C29:**

`=C27/C28`

Here, cell **C27 **is the amount of the companyâ€™s **EBIT.** And cell **C28** is the interest expense of the company.

- Then, press
**Enter**.

- Next, drag the
**Fill Handle**icon to the right. - Therefore, you will obtain the companyâ€™s interest coverage ratio over the last four years

we will get an interest coverage ratio of 3.57Â which means the above companyâ€™s profits are able to cover the interest 3.57 times. From the above calculation, we see that the interest coverage ratio increases every year. This is a good sign for the company. That means the company is in stable condition.

**Read More:** **How to Calculate Ratio in Excel (4 Handy Methods)**

## Conclusion

Thatâ€™s the end of todayâ€™s session. I strongly believe that from now you may calculate the interest coverage ratio in Excel. If you have any queries or recommendations, please share them in the comments section below.

Donâ€™t forget to check our website **Exceldemy.com** for various Excel-related problems and solutions. Keep learning new methods and keep growing!