Interest Coverage Ratio
Interest Coverage = EBIT / Interest Expense, measuring a company's ability to service debt obligations from operating earnings.
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Definition
Interest Coverage = EBIT / Interest Expense, measuring a company's ability to service debt obligations from operating earnings.
Use case
Used in financial ratios workflows, analysis, and technical interviews.
Judgment check
Useful only when the assumptions and inputs behind the metric are understood.
Deep dive
How to think about Interest Coverage Ratio
Higher ratios indicate stronger debt-servicing capacity and lower default risk. A ratio below 1.0 means the company cannot cover interest from operations. Banks typically require coverage ratios above 2.5-3.0 for lending. Declining coverage over time signals increasing financial distress.
Example: Company generates $150M EBIT with $30M annual interest expense. Interest coverage = 5.0x — strong capacity. If EBIT falls to $50M, coverage drops to 1.67x — creditors may become concerned about repayment ability.