Interest Coverage Ratio & Can Earnings Cover the Interest
Tests your debt servicing
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The interest coverage ratio is EBIT ÷ interest — how many times your farm profit covers its loan interest. Enter both to get the ratio and a strong / adequate / weak verdict.
Can you service the debt?
Next: keep coverage above 3× through price dips and lean years; that headroom is what keeps lenders comfortable.
ICR = EBIT ÷ interest expense. ≥3× is strong, 1.5–3× adequate, below 1.5× weak. A ratio of 1× means profit only just covers interest, with nothing left for principal or shocks.
Interest coverage ratio — key facts
- Formula
- ICR = EBIT ÷ interest
- EBIT
- operating profit before interest & tax
- Strong
- 3.0 or more
- Adequate
- 1.5 to 3.0
- Weak
- below 1.5
- Measures
- ability to service debt from earnings
- Excludes
- principal repayments and tax
- Privacy
- Runs in your browser; nothing uploaded
Before the principal, the interest has to be paid — can it?
Debt is only dangerous when the earnings cannot carry it. The interest coverage ratio asks the first, hardest question — does this year's operating profit cover the loan interest, and by how much? It is EBIT ÷ interest, so a ratio of 4 means earnings cover interest four times over. Above 3 is strong, 1.5 to 3 is adequate but tight, and below 1.5 is weak, where a single bad season could leave the interest unpaid.
This tool returns the ratio and the strong / adequate / weak verdict instantly. Use it before taking on a tractor, land or expansion loan, and test a low-income year to see how thin the cushion gets. Read it alongside the Debt-to-Asset Ratio for solvency, and pair it with the Annuity Future Value and Inventory Carrying Cost tools for the whole financial picture.
Judge loan safety
See how many times earnings cover the interest bill.
Instant verdict
Strong, adequate or weak against the standard thresholds.
Stress-test a bad year
Lower EBIT and watch how close the weak band gets.
Pair with solvency
Combine with debt-to-asset for the full debt picture.
Frequently Asked Questions
How is the interest coverage ratio calculated?+
It is earnings before interest and tax divided by interest expense: ICR = EBIT ÷ interest. A farm with 600,000 of EBIT and 150,000 of interest has a ratio of 4.0, meaning earnings cover the interest four times over. The higher the ratio, the more comfortably the farm can service its debt.
What is a good interest coverage ratio?+
A ratio of 3.0 or more is strong — earnings cover interest at least three times, leaving a healthy cushion. Between 1.5 and 3.0 is adequate but tight, with little room for a bad year. Below 1.5 is weak: a small drop in income or a rate rise could leave the farm unable to meet its interest, which the tool flags directly.
What is EBIT for a farm?+
EBIT is earnings before interest and tax — your farm operating profit before any loan interest or income tax is deducted. Start from gross revenue, subtract operating costs like seed, fertilizer, labour, fuel and repairs, but do not subtract loan interest or tax. That operating profit is what is genuinely available to cover interest.
How is interest coverage different from debt-to-asset?+
Debt-to-asset measures solvency — the share of the farm funded by debt, from the balance sheet. Interest coverage measures the ability to service that debt from this year's earnings, from the profit and loss. A farm can have a sound balance sheet yet a weak coverage ratio in a poor year, so the two ratios together give a fuller picture.
Why do lenders look at this ratio?+
It tells a lender whether the farm's earnings are enough to keep paying interest before any other claim. A ratio comfortably above 2 or 3 reassures them the loan is serviceable even if income dips; a ratio near 1 means there is almost no margin for error. It is a key check before a tractor, land or expansion loan is approved.
What pushes the ratio below 1.5?+
Heavy borrowing at high interest, a poor harvest or low prices that shrink EBIT, or a rate rise on a floating-rate loan. Any of these lifts interest relative to earnings and pulls the ratio toward the weak band. The fix is to grow operating profit, cut the most expensive debt, or refinance to a lower rate.
Does ICR include principal repayments?+
No — interest coverage only measures interest, not the principal you also repay each year. A ratio that looks comfortable on interest alone can still be tight once principal is added, so pair it with a debt-service coverage measure that includes the full loan instalment for a complete view of repayment capacity.
Are the figures exact?+
The ratio is exact for the EBIT and interest you enter — it is a simple division. Its value depends on an honest EBIT, so include all real operating costs and exclude interest and tax. Re-run it with the season's actual figures, and test a low-income scenario, to see how close to the weak band a bad year would push you.
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