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Investment Dictionary

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EBITDA Coverage Ratio


EBITDA coverage ratio (also called EBITDA to Interest Coverage Ratio) shows company’s capability to deal with its financial leverage. If this ratio is too low, that may show company is in trouble and may have difficulties to payout its debts. 


Even if EBITDA coverage ratio is little lower (the higher ratio is the better) than 1, company may have problems. That may happen if company is needed to make investments in fixed assets to maintain its business at least in current level, or it has to redeem some financial liabilities and nobody else wants to lend funds at previous interests (it may happen if market conditions change).


EBITDA coverage ratio calculation

EBITDA coverage ratio = EBITDA / Interest expenses

EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) = Pretax Profit + Financial expenses – Financial Income + Taxes + Depreciation + Amortization.

EBITDA also is used for EBITDA multiple calculation.  


Instead of EBITDA coverage ratio a interest coverage ratio is often used, however the first one has more advantages.


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