Definition
Interest coverage ratio measures a company's ability to service its debt obligations from operating income. Below 1.5x signals potential distress. Above 3.0x generally indicates comfortable coverage. Lenders and rating agencies closely monitor this ratio when assessing creditworthiness.
functions Formula
Interest Coverage = EBIT / Interest Expense
lightbulb Example
EBIT is $12M and annual interest expense is $3M. Coverage = 4.0x, meaning the company earns 4 times its interest obligations—comfortably positioned even if earnings decline moderately.
verified_user Key Points
- Below 1.5x is a warning sign for debt distress
- Investment-grade companies typically maintain 3x+
- EBITDA coverage is a less conservative variant
- Deteriorating trend is more concerning than absolute level