Financial Covenant Ratio Calculator
Calculate and analyze key financial covenant ratios to ensure compliance with lender requirements. Perfect for business owners and finance professionals.
Financial Data Input
Optional Covenant Limits
Covenant Ratio Results
Enter financial data and click "Calculate Ratios" to see compliance status
Disclaimer
This calculator provides informational results only and does not replace professional financial advice or legal consultation.
What Are Financial Covenant Ratios?
Financial covenant ratios are rules set by lenders to ensure a borrower stays financially healthy. These ratios act as early warning signs. If a ratio moves outside the agreed limit, it signals potential financial stress.
Think of them as checkpoints in a race. They help both lenders and businesses spot problems before they become serious issues.
Why Financial Covenants Matter
Covenants protect both lenders and borrowers. For lenders, they reduce risk by ensuring loans are repaid. For businesses, they act as checkpoints, helping management spot problems early rather than too late.
When covenants are breached, it doesn't automatically mean default. It does mean having an important conversation with your lender about the business situation.
How This Calculator Helps
Instead of digging through spreadsheets or financial statements, this calculator lets you enter basic financial numbers and instantly see whether you are within covenant limits. It does the math and explains the result in plain language.
The color-coded results make it immediately clear which covenants are healthy (green), which need attention (yellow), and which are in breach (red).
Financial Covenant Ratios Covered
1. Debt Service Coverage Ratio (DSCR)
DSCR = Net Operating Income ÷ Total Debt Service
Shows whether your business generates enough cash to cover debt payments. Higher is better.
2. Debt to EBITDA Ratio
Debt/EBITDA = Total Debt ÷ EBITDA
Measures how many years of earnings it would take to pay off all debt. Lower is better.
3. Interest Coverage Ratio
Interest Coverage = EBITDA ÷ Interest Expense
Shows how many times your earnings can cover interest payments. Higher is better.
4. Debt to Equity Ratio
Debt/Equity = Total Debt ÷ Total Equity
Compares borrowed money to owner investment. Lower is generally better.
5. Equity Ratio
Equity Ratio = Total Equity ÷ Total Assets
Shows what portion of assets is financed by owners rather than debt. Higher is generally better.
Example Calculations
Sample Company Data:
A manufacturing company has:
- • Total Debt: $500,000
- • EBITDA: $250,000
- • Interest Expense: $50,000
- • Total Equity: $300,000
- • Total Assets: $800,000
With covenant limits: Debt/EBITDA ≤ 3.0, Interest Coverage ≥ 2.0
Calculated Ratios:
Covenant Ratio Examples
| Ratio Type | Formula Result | Covenant Limit | Status |
|---|---|---|---|
| Debt/EBITDA | 2.0 | ≤ 3.0 | Pass |
| Interest Coverage | 5.0 | ≥ 2.0 | Pass |
| Debt/Equity | 1.25 | ≤ 2.0 | Pass |
| Equity Ratio | 0.375 | ≥ 0.3 | Pass |
How Lenders Interpret Ratios
Healthy Range
- • Debt/EBITDA: < 3.0
- • Interest Coverage: > 3.0
- • Debt/Equity: < 2.0
- • Equity Ratio: > 0.4
Warning Range
- • Debt/EBITDA: 3.0–4.0
- • Interest Coverage: 1.5–3.0
- • Debt/Equity: 2.0–3.0
- • Equity Ratio: 0.2–0.4
Risk Zone
- • Debt/EBITDA: > 4.0
- • Interest Coverage: < 1.5
- • Debt/Equity: > 3.0
- • Equity Ratio: < 0.2
Who Can Use This Calculator?
- Business owners checking bank compliance
- Startup founders preparing for funding rounds
- Finance students practicing ratio analysis
- Bankers and credit analysts reviewing loans
- Accountants and advisors monitoring client health
No advanced finance background is required. The calculator handles all the complex math and provides clear explanations.
Final Thoughts
Financial covenant ratios are not just bank requirements — they are powerful tools for understanding financial stability. This calculator turns complex financial rules into clear, actionable insights that anyone can understand.